The proliferation and differentiation of neural precursor cells is largely controlled by environmental factors. By providing the factors that favor the proliferation or suppress the differentiation of this cell type, we isolated and expanded an early neuroepithelial predifferentiated cell type from E9 rat neural plate in serum-free medium. This has led to the establishment of a neural epithelial precursor (NEP) cell line. The NEP cell's properties are substantially different from those of cell lines previously derived from neural tissue at later stages of development. Initial selection and survival of this cell type requires a factor secreted by an embryonic Schwann (nrESC) cell line. Continued passage of these cells requires cell-cell contact for both survival and growth. Neural cell differentiation can be induced in this nestin positive precursor cell line by bFGF and forskolin. General neuronal markers, as well as cortical neuron-specific protein kinase C isozyme, and accumulation of glutamate and aspartate were induced in most cells. Choline acetyl-transferase was also induced in a small number of cells. When implanted into neonatal rat brain, the NEP cell line gave rise to several distinct neuronal and glial phenotypes in different regions of the brain including cerebellar cortex and hippocampus.