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We have investigated the phenotypic and bioassay characteristics of bone marrow mesenchymal stromal cells (MSCs) differentiated along a Schwann cell lineage using glial growth factor. Expression of the Schwann cell markers S100, P75, and GFAP was determined by immunocytochemical staining and Western blotting. The levels of the stem cell markers Stro-1 and alkaline phosphatase and the neural progenitor marker nestin were also examined throughout the differentiation process. The phenotypic properties of cells differentiated at different passages were also compared. In addition to a phenotypic characterization, the functional ability of differentiated MSCs has been investigated employing a co-culture bioassay with dissociated primary sensory neurons. Following differentiation, MSCs underwent morphological changes similar to those of cultured Schwann cells and stained positively for all three Schwann cell markers. Quantitative Western blot analysis showed that the levels of S100 and P75 protein were significantly elevated upon differentiation. Differentiated MSCs were also found to enhance neurite outgrowth in co-culture with sensory neurons to a level equivalent or superior to that produced by Schwann cells. These findings support the assertion that MSCs can be differentiated into cells that are Schwann cell-like in terms of both phenotype and function.