We have developed a method for genetically modifying Schwann cells (SCs) in vitro and then assessed whether these SCs could interact normally with axons in vivo. Rat SCs were transduced in vitro with the lacZ gene by using a retroviral vector and then expanded with the SC mitogens forskolin and glial growth factor. These mitogen-expanded SCs had an abnormal phenotype as compared to both SCs in vivo and primary SCs in vitro, yet when they were introduced into a regenerating rat sciatic nerve, they formed morphologically normal myelin sheaths around the axons. These results demonstrate that SCs can be genetically altered, their numbers expanded in culture, and yet respond appropriately to axonal signals in the peripheral nervous system. This approach offers a plausible way to manipulate genes involved in axon-SC interactions, including genes that may be defective in some inherited peripheral neuropathies.