The potential of bone marrow cells to differentiate into myelin-forming cells and to repair the demyelinated rat spinal cord in vivo was studied using cell transplantation techniques. The dorsal funiculus of the spinal cord was demyelinated by x-irradiation treatment, followed by microinjection of ethidium bromide. Suspensions of a bone marrow cell fraction acutely isolated from femoral bones in LacZ transgenic mice were prepared by centrifugation on a density gradient (Ficoll-Paque) to remove erythrocytes, platelets, and debris. The isolated cell fraction contained hematopoietic and nonhematopoietic stem and precursor cells and lymphocytes. The cells were transplanted into the demyelinated dorsal column lesions of immunosuppressed rats. An intense blue β-galactosidase reaction was observed in the transplantation zone. The genetically labeled bone marrow cells remyelinated the spinal cord with predominately a peripheral pattern of myelination reminiscent of Schwann cell myelination. Transplantation of CD34+ hematopoietic stem cells survived in the lesion, but did not form myelin. These results indicate that bone marrow cells can differentiate in vivo into myelin-forming cells and repair demyelinated CNS. GLIA 35:26–34, 2001. © 2001 Wiley-Liss, Inc.