The objective was to investigate the regeneration of a transected peripheral nerve after transplantation of fragmented embryonic (E14-15) spinal cord cells which were encapsulated within a vein cavity. After 3 months transplantation, axonal regeneration was observed by staining with HE and antibody to neurofilament subtypes in six of 10 rats. In all six animals compound muscle action potentials to electrical stimulation could be recorded and indicated incomplete reinnervation of the fibular and tibial nerve, respectively. A chronic inflammation process around the transplant and a negative result of staining neurofilaments within the vein cavity and the transected nerve were found in animals lacking electrophysiological response to stimulation.