Studies of bone marrow stromal cells (MSCs) transplanted into the spinal cord-injured rat give mixed results: some groups report improved locomotor recovery while others only demonstrate improved histological appearance of the lesion. These studies show no clear correlation between neurological improvements and MSC survival. We examined whether MSC survival in the injured spinal cord could be enhanced by closely matching donor and recipient mice for genetic background and marker gene expression and whether exposure of MSCs to a neural environment (Schwann cells) prior to transplantation would improve their survival or therapeutic effects. Mice underwent a clip compression spinal cord injury at the fourth thoracic level and cell transplantation 7 days later. Despite genetic matching of donors and recipients, MSC survival in the injured spinal cord was very poor (∼1%). However, we noted improved locomotor recovery accompanied by improved histopathological appearance of the lesion in mice receiving MSC grafts. These mice had more white and gray matter sparing, laminin expression, Schwann cell infiltration, and preservation of neurofilament and 5-HT-positive fibers at and below the lesion. There was also decreased collagen and chondroitin sulphate proteoglycan deposition in the scar and macrophage activation in mice that received the MSC grafts. The Schwann cell cocultured MSCs had greater effects than untreated MSCs on all these indices of recovery. Analyses of chemokine and cytokine expression revealed that MSC/Schwann cell cocultures produced far less MCP-1 and IL-6 than MSCs or Schwann cells cultured alone. Thus, transplanted MSCs may improve recovery in spinal cord-injured mice through immunosuppressive effects that can be enhanced by a Schwann cell coculturing step. These results indicate that the temporary presence of MSCs in the injured cord is sufficient to alter the cascade of pathological events that normally occurs after spinal cord injury, generating a microenvironment that favors improved recovery.