Alzheimer's disease (AD) is characterized by the deposition of amyloid-b peptide (Ab) and the formation of neurofibrillary tangles. Transplantation of bone marrow-derived mesenchymal stem cells (BM-MSCs) has been suggested as a potential therapeutic approach to prevent various neurodegenerative disorders, including AD. However, the actual therapeutic impact of BM-MSCs and their mechanism of action in AD have not yet been ascertained. The aim of this study was therefore to evaluate the therapeutic effect of BM-MSC transplantation on the neuropathology and memory deficits in amyloid precursor protein (APP) and presenilin one (PS1) double-transgenic mice. Here we show that intracerebral transplantation of BM-MSCs into APP/PS1 mice significantly reduced amyloid b-peptide (Ab) deposition. Interestingly, these effects were associated with restoration of defective microglial function, as evidenced by increased Ab-degrading factors, decreased inflammatory responses, and elevation of alternatively activated microglial markers. Furthermore, APP/PS1 mice treated with BM-MSCs had decreased tau hyperphosphorylation and improved cognitive function. In conclusion, BM-MSCs can modulate immune/inflammatory responses in AD mice, ameliorate their pathophysiology, and improve the cognitive decline associated with Ab deposits. These results demonstrate that BM-MSCs are a potential new therapeutic agent for AD. STEM CELLS 2010;28:329-343 Disclosure of potential conflicts of interest is found at the end of this article.