We aimed to determine if and how endothelial cells (EC) recruit precursors of smooth muscle cells and pericytes and induce their differentiation during vessel formation. Multipotent embryonic 10T1/2 cells were used as presumptive mural cell precursors. In an under-agarose coculture, EC induced migration of 10T1/2 cells via platelet-derived growth factor BB. 10T1/2 cells in coculture with EC changed from polygonal to spindle-shaped, reminiscent of smooth muscle cells in culture. Immunohistochemical and Western blot analyses were used to examine the expression of smooth muscle (SM)-specific markers in 10T1/2 cells cultured in the absence and presence of EC. SM-myosin, SM22α, and calponin proteins were undetectable in 10T1/2 cells cultured alone; however, expression of all three SM-specific proteins was significantly induced in 10T1/2 cells cocultured with EC. Treatment of 10T1/2 cells with TGF-β induced phenotypic changes and changes in SM markers similar to those seen in the cocultures. Neutralization of TGF-β in the cocultures blocked expression of the SM markers and the shape change. To assess the ability of 10T1/2 cells to contribute to the developing vessel wall in vivo, prelabeled 10T1/2 cells were grown in a collagen matrix and implanted subcutaneously into mice. The fluorescently marked cells became incorporated into the medial layer of developing vessels where they expressed SM markers. These in vitro and in vivo observations shed light on the cell–cell interactions that occur during vessel development, as well as in pathologies in which developmental processes are recapitulated.