The mammalian central nervous system (CNS) has little capacity for self-repair after injury, and neurons are not capable of proliferating. Therefore, neural tissue engineering that combines neural stem and progenitor cells and biologically derived polymer scaffolds may revolutionize the medical approach to the treatment of damaged CNS tissues. Neural stem and progenitor cells isolated from embryonic rat cortical or subcortical neuroepithelium were dispersed within type I collagen, and the cell-collagen constructs were cultured in serum-free medium containing basic fibroblast growth factor. The collagen-entrapped stem and progenitors actively expanded and efficiently generated neurons, which developed neuronal polarity, neurotransmitters, ion channels/receptors, and excitability. Ca2+ imaging showed that differentiation from BrdU+/TuJ1- to BrdU-/TuJ1+ cells was accompanied by a shift in expression of functional receptors for neurotransmitters from cholinergic and purinergic to predominantly GABAergic and glutamatergic. Spontaneous postsynaptic currents were recorded by patch-clamping from precursor cell-derived neurons and these currents were partially blocked by 10-microM bicuculline, and completely blocked by additional 10 microM of the kainate receptor antagonist CNQX, indicating an appearance of both GABAergic and glutamatergic synaptic activities. Staining with endocytotic marker FM1-43 demonstrated active synaptic vesicle recycling occurring among collagen-entrapped neurons. These results show that neural stem and progenitor cells cultured in 3D collagen gels recapitulate CNS stem cell development; this is the first demonstration of CNS stem and progenitor cell-derived functional synapse and neuronal network formation in a 3D matrix. The proliferative capacity and neuronal differentiating potential of neural progenitors in 3D collagen gels suggest their potential use in attempts to promote neuronal regeneration in vivo.