Transforming growth factor beta (TGF beta) promotes epithelial cell differentiation but induces Schwann cell proliferation. We show that the protooncogene Ski (Sloan-Kettering viral oncogene homologue) is an important regulator of these effects. TGF beta down-regulates Ski in epithelial cells but not in Schwann cells. In Schwann cells but not in epithelial cells, retinoblastoma protein (Rb) is up-regulated by TGF beta. Additionally, both Ski and Rb move to the cytoplasm, where they partially colocalize. In vivo, Ski and phospho-Rb (pRb) appear to interact in the Schwann cell cytoplasm of developing sciatic nerves. Ski overexpression induces Rb hyperphosphorylation, proliferation, and colocalization of both proteins in Schwann cell and epithelial cell cytoplasms independently of TGF beta treatment. Conversely, Ski knockdown in Schwann cells blocks TGF beta-induced proliferation and pRb cytoplasmic relocalization. Our findings reveal a critical function of fine-tuned Ski levels in the control of TGF beta effects on the cell cycle and suggest that at least a part of Ski regulatory effects on TGF beta-induced proliferation of Schwann cells is caused by its concerted action with Rb.