c-Myc and Mad each form heterodimers with Max that bind the same E-box related DNA sequences. Whereas Myc:Max complexes activate transcription and promote cell proliferation and transformation, Mad:Max complexes repress transcription and block c-Myc-mediated cell transformation. Here we examine these antagonistic transcription factors during epithelial differentiation and neoplastic progression. During differentiation of primary human keratinocytes, Mad is rapidly induced and c-Myc is downregulated, resulting in a switch from c-Myc:Max to Mad:Max heterodimers. In normal epidermis and colonic mucosa c-myc expression is restricted to proliferating cell layers, while mad expression is restricted to differentiating cell layers. Using HPV18 transformed keratinocytes that vary in their ability to differentiate in organotypic cultures, we find that Mad induction occurs only in those cells that retain a differentiation response. In the epidermis of transgenic mice in which expression of the HPV16 E6 and E7 oncogenes are targeted to basal keratinocytes, neoplastic progression occurs and is marked by an expansion of c-myc expressing basal-like cells. Expression of mad is found only in growth-arrested differentiating cells on the outer edges of preneoplastic lesions. The squamous cell carcinomas that arise evidence a variable number of sites within the tumor masses where mad expression and morphological differentiation coincide; increasing malignancy correlates with loss of both mad and capability to differentiate. These results indicate that c-Myc and Mad expression are tightly coupled to the transition from proliferation to differentiation of epithelial cells and that restriction of Mad expression may be associated with loss of normal differentiation capability and with tumorigenesis.