Amongst the many cell types that differentiate from migratory neural crest cells are the Schwann cells of the peripheral nervous system. While it has been demonstrated that Schwann cells will not fully differentiate unless in contact with neurons, the factors that cause neural crest cells to enter the differentiative pathway that leads to Schwann cells are unknown. In a previous paper (Development 105: 251, 1989), we have demonstrated that a proportion of morphologically undifferentiated neural crest cells express the Schwann cell markers 217c and NGF receptor, and later, as they acquire the bipolar morphology typical of Schwann cells in culture, express S-100 and laminin. In the present study, we have grown axons from embryonic retina on neural crest cultures to see whether this has an effect on the differentiation of neural crest cells into Schwann cells. After 4 to 6 days of co-culture, many more cells had acquired bipolar morphology and S-100 staining than in controls with no retinal explant, and most of these cells were within 200 microns of an axon, though not necessarily in contact with axons. However, the number of cells expressing the earliest Schwann cell markers 217c and NGF receptor was not affected by the presence of axons. We conclude that axons produce a factor, which is probably diffusible, and which makes immature Schwann cells differentiate. The factor does not, however, influence the entry of neural crest cells into the earliest stages of the Schwann cell differentiative pathway.