Schwann cells (SC), the glial cells of peripheral nerves, are involved in many diseases including Charcot Marie Tooth and neurofibromatosis, and play a pivotal role in peripheral nerve regeneration. Although it is possible to obtain human SC from nerve biopsies, they are difficult to maintain and expand in culture. Here we describe an efficient system for directing the differentiation of human embryonic stem cells (hESC) into cells with the morphological and molecular characteristics of SC. Neurospheres were generated from hESC using stromal cell induction and grown under conditions supportive of SC differentiation. After 8 weeks, hESC-derived SC expressed characteristic markers GFAP, S100, HNK1, P75, MBP and PMP-22, and were observed in close association with hESC-derived neurites. ~60% of the cells were double-immunostained for the SC markers GFAP/S100. RT-PCR analysis confirmed the expression of GFAP, S100, P75, PMP-22 and MBP and demonstrated expression of the SC markers P0, KROX20 and PLP in the cultures. Expression of CAD19 was observed in 2 and 4 week cultures and then was down-regulated, consistent with its expression in SC precursor, but not mature stages. Co-culture of hESC-derived SC with rat, chick or hESC-derived axons in compartmentalized microfluidic chambers resulted in tight association of the SC with axons. Apparent wrapping of the axons by SC was occasionally observed, suggestive of myelination. Our method for generating SC from hESC makes available a virtually unlimited source of human SC for studies of their role in nerve regeneration and modeling of disease.