Recent studies suggest that tissue-specific stem cells possess much wider potential for differentiation than previously thought and can, in some instances, even cross germ layer boundaries. However, information is lacking regarding the efficiency and the fidelity of their differentiation along heterologous lineages. To address these issues of transdifferentiation, we have analyzed the heterologous potential of stem cells within the same germ layer. We report the neural potential of cells isolated from the limbal epithelium of the adult cornea. Limbal epithelium, which, like the neuroepithelium, is ectodermally derived, participates in the regeneration of cornea throughout life. We have observed that limbal epithelial cells, when removed from their niche and cultured in the presence of mitogens, begin to express neural progenitor markers. Based on the self-renewal property, it is likely that the nestin-positive progenitors are derived from limbal stem cells rather than transit-amplifying (TA) cells that have limited proliferating potential. In differentiation conditions, a subset of these cells acquire neural morphology and express transcripts and proteins specific to neurons and glia, suggesting their differentiation along neural lineage. The acquisition of neural properties is regulated by BMP signaling. Neural differentiation of these cells is also observed upon heterotopic transplantation. Investigation of functional differentiation of cells by electrophysiological analysis reveals properties consistent with the presence of glia that are influenced by extracellular cues. However, similar analyses coupled with Ca(2+) imaging suggest an incomplete differentiation of limbal epithelial-derived neural progenitors into neurons in the condition studied. Our study, therefore, draws attention toward the necessity for rigorous characterization of transdifferentiation and offers a model for characterizing neural potential of heterologous stem cells/progenitors.