Exposing rat Schwann cells co-cultured with nerve cells to a reconstituted basement membrane induced the formation of myelin segments by Schwann cells. This occurred in a serum-free culture medium in which, in the absence of this matrix, Schwann cells proliferate but fail to differentiate. This reconstituted basement membrane was prepared from solubilized extracellular matrix proteins synthesized by a basement membrane-producing murine tumor. The major constituents of this reconstituted matrix are collagen type IV, laminin, heparan sulfate proteoglycan, entactin, and nidogen. The matrix also elicited striking morphological changes in Schwann cells, inducing them to spread longitudinally along the nerve fibers (a necessary early step in the process of ensheathment of nerve fibers). Several observations indicated that the effect of the matrix was exerted directly on Schwann cells and not indirectly through an effect on nerve cells. First, the matrix-induced cell spreading occurred only in areas in which Schwann cells directly contacted the matrix; Schwann cells that were associated with the same nerve fibers but that did not themselves directly contact the matrix did not exhibit spreading. Second, the matrix-induced alteration in Schwann cell morphology was observed in cultures in which the nerve cells were removed. These results provide direct evidence that basement membrane contact induces normal Schwann cell differentiation, and support the idea that Schwann cell differentiation in vivo may be regulated by the appearance of the basement membrane, which normally envelops terminally differentiating Schwann cells.