New vessels form de novo (vasculogenesis) or from pre-existing vessels (angiogenesis) in a process that involves the interaction of endothelial cells (EC) and pericytes/smooth muscle cells (SMC). One basic component of this interaction is the endothelial-induced recruitment, proliferation and subsequent differentiation of pericytes and SMC. We have previously demonstrated that TGFβ induces the differentiation of C3H/10T1/2 (10T1/2) mesenchymal cells toward a SMC/pericyte lineage. The current study tests the hypothesis that TGFβ not only induces SMC differentiation but stabilizes capillary-like structures in a three-dimensional (3D) model of in vitro angiogenesis. 10T1/2 and EC in Matrigel™ were used to establish cocultures that form cord structures that are reminiscent of new capillaries in vivo. Cord formation is initiated within 2–3 h after plating and continues through 18 h after plating. In longer cocultures the cord structures disassemble and form aggregates. 10T1/2 expression of proteins associated with the SMC/pericyte lineage, such as smooth muscle α-actin (SMA) and NG2 proteoglycan, are upregulated in these 3D cocultures. Application of neutralizing reagents specific for TGFβ blocks cord formation and inhibits expression of SMA and NG2 in the 10T1/2 cells. We conclude that TGFβ mediates 10T1/2 differentiation to SMC/pericytes in the 3D cocultures and that association with differentiated mural cells is required for formation of capillary-like structures in Matrigel™.