Various neural tissue engineering approaches that are under development for applications ranging from guidance conduits to cell-based therapies rely on the ability to encapsulate cells in three-dimensional (3D) scaffolds. Schwann cells play a key role in peripheral nerve regeneration by forming oriented paths for regrowing axons. We have engineered collagen and hyaluronic acid interpenetrating polymer network (IPN) hydrogels with and without laminin as a 3D culture system for Schwann cells in an attempt to devise novel neural regeneration therapies. Encapsulation of Schwann cells in 3D hydrogel constructs did not affect cell viability and cells were viable for 2 weeks in all hydrogel samples. Moreover, in hydrogels with high cell density, cells underwent spreading and proliferation, and the cell numbers increased by day 14 as assessed qualitatively using a Live/dead assay and scanning electron microscopy (SEM), and quantitatively using a CellTiter 96 AQueous non-radioactive cell proliferation assay. In some cases, the cells aligned parallel to each other and formed structures reminiscent of Bands of Büngner. Schwann cells in cell-hydrogel constructs with high cell density were not only viable but also actively secreting nerve growth factor and brain-derived neurotrophic factor. Of particular importance was the observation that addition of laminin in these hydrogels increased the overall production of nerve growth factor and brain-derived neurotrophic factor from the cells. Immunostaining revealed that S100 expression and cell spreading were differentially affected by cell density. Interestingly, in the co-culture of dissociated neurons with Schwann cells, neurons were able to extend neurites and some neurites were observed to follow Schwann cells. Therefore, we conclude that Schwann cells encapsulated in the 3D extracellular matrix-mimicking hydrogel may hold promise in nerve regeneration therapies and may form the basis for understanding the underlying mechanisms of Schwann cell interactions with neurons and various extracellular matrix components.