Kallmann's syndrome is caused by the failure of olfactory axons and gonadotropin-releasing hormone (GnRH) neurons to enter the embryonic forebrain, resulting in anosmia and sterility. Sox10 mutations have been associated with Kallmann's syndrome phenotypes, but their effect on olfactory system development is unknown. We recently showed that Sox10 is expressed by neural crest-derived olfactory ensheathing cells (OECs). Here, we demonstrate that in homozygous Sox10(lacZ/lacZ) mouse embryos, OEC differentiation is disrupted; olfactory axons accumulate in the ventromedial olfactory nerve layer and fewer olfactory receptor neurons express the maturation marker OMP (most likely owing to the failure of axonal targeting). Furthermore, GnRH neurons clump together in the periphery and a smaller proportion enters the forebrain. Our data suggest that human Sox10 mutations cause Kallmann's syndrome by disrupting the differentiation of OECs, which promote embryonic olfactory axon targeting and hence olfactory receptor neuron maturation, and GnRH neuron migration to the forebrain.