Schwann cell-axon interaction is the hallmark feature of peripheral nerves, yet the intracellular signals underlying this interaction are unknown. Schwann cells extend processes and migrate on developing axons before differentiation, requiring coordinated regulation of the Schwann cell cytoskeleton. Small GTPases of the Rho family, including Rho, Rac, and cell division cycle 42, regulate the actin cytoskeleton. The neurofibromatosis type 2 (NF2) gene is commonly mutated in schwannomas, Schwann cell tumors that contain cells lacking axon interaction. NF2 is involved in suppression of Rac signaling, and cultured schwannoma cells contain elevated, GTP-bound, active Rac. Despite these previous studies, a causal relationship between Rac activation and the abnormal cellular morphology of schwannoma is unknown. We used fluorescence resonance energy transfer to follow Rac activity in normal human Schwann cells and schwannoma cells during interaction with neurons. Normal Schwann cells elongated processes along neurites under low Rac activity. Schwannoma cells showed high Rac activity at distal regions of the cells and failed to align processes with neurites. Application of a Rac-specific inhibitor, the chemical compound NSC23766, to schwannoma cells restored neuronal interaction. The data support the significance of regulated Rac signaling in mediating Schwann cell-axon interaction and suggest that controlling Rac activity as a possible therapy for schwannomas.