Background Long-term success in lung transplantation is limited by obliterative bronchiolitis (OB). Presently, complete understanding of the mechanisms of OB has been elusive. Bone marrowderived mesenchymal stem cells (MSC) have been shown to modulate repair of the injured lung in multiple disease models. We hypothesized that the injection of MSC would prevent development of early airway obstruction (AO) in the heterotopic tracheal transplant model. Methods Forty-four tracheas from BALB/c and C57BL/6 donors were transplanted into 22 C57BL/6 recipients. At the time of transplant, 13 of the allogeneic recipient mice were injected with 5 × 105 MSC from various murine sources. To confirm the role of the immune response in the generation of AO we used a permeable inhibitor of nuclear factor-kappaB (NF-κB) in 11 recipients after transplantation with 22 BALB/c tracheas. Results After transplantation, administration of MSC inhibited intraluminal obstruction by collagen in 98% of the mice and transforming factor-beta (TGF-β) expression decreased to levels similar to those observed in isograft controls. These effects were associated with a significant (p < 0.05) increase in expression of the anti-inflammatory cytokine interleukin-10 (IL-10). NF-κB inhibitor showed decreased expression of transforming growth factor-beta (TGF-β) in the Day 7 and Day 14 groups, resulting in a 60% reduction of luminal obstruction as well as a decrease in inflammatory cells to the airway. Conclusion Our observations suggest that administration of MSC prevents development of airway occlusion in a mouse model, probably through the modulated immune response altering TGF-β expression.