Stem cell technology promises new and rapid advances in cell therapy and drug discovery. Clearly, the value of this approach will be limited by the differentiated functions displayed by the progeny of stem cells. The foetal and adult central nervous system (CNS) harbour stem cells that can be expanded in vitro and differentiate into immature neurons and glia. Surprisingly, we do not know if neurons derived from stem cells form synapses, a definitive feature of neuronal function. Neuronal differentiation is a complex process and in this paper we establish conditions that permit extensive maturation of neurons in the presence of neurotrophins. These conditions permit the differentiation of rat hippocampal stem cells into both excitatory (glutamatergic) and inhibitory (GABAergic) neurons. The proportion of excitatory and inhibitory synapses was strongly influenced by specific neurotrophins, and these responses reflect the region of origin of the stem cells in the brain. These data show that stem cells can be used to study mechanisms of excitation and inhibition in the nervous system.