Understanding molecular mechanisms underlying lung cancer is a prerequisite toward treatment. To enable mechanistic investigations into the epigenetic regulation of the tumor suppressor gene cell adhesion molecule 1 (Cadm1) in lung cancer progenitor cells, we developed 10 cell lines from single, spontaneously transformed lung tumor cells isolated from c-Myc and c-Raf double-transgenic mice. Specifically, we investigated Cadm1 promoter hypermethylation, which was significantly induced in transgenic transformed cells. Analysis of 69 CpGs displayed differential methylation pattern between and within progenitor cell lines, and the degree of methylation correlated well with transcriptional repression. Indeed, restoration of Cadm1 gene expression was achieved by treatment with the experimental demethylating drug 5-aza-2'-deoxycytidine. Furthermore, methylation of core CpGs in the binding sites of Sp1, Sp3, and zinc finger 5 along the promoter region of Cadm1 abrogated DNA-protein binding. Treatment with mithramycin A, an inhibitor of Sp1 or Sp3 binding, resulted in reduction of Cadm1 gene expression, therefore suggesting a potential role of Sp1/Sp3 in Cadm1 regulation. Identifying molecular rules for the epigenetic control of tumor suppressor genes enables mechanistic insights into lung cancer growth and opportunities for novel therapies.