While axonal regeneration is more successful in peripheral nerve than in the central nervous system, it is by no means complete and research to enhance peripheral nerve regeneration is clinically important. Olfactory ensheathing cells (OECs) are known to enhance axonal regeneration and to produce myelin after transplantation. In contrast to Schwann cells their migratory potential and ability to penetrate glial scars is higher. This study evaluated the effect of OEC transplantation on microsurgically repaired sciatic nerves. Rat sciatic nerves were transected followed by microsurgical repair and transplantation of OECs or injection of medium without cells. Twenty-one days later the nerves were removed and prepared for either histology or electrophysiological analysis. Footprint analysis was carried out at 7, 14 and 21 days. The OECs survived and integrated into the repaired nerves as indicated by eGFP-expressing cells aligned with neurofilament identified axons bridging the repair site. Moreover, regenerated axons were myelinated by the transplanted OECs and nodes of Ranvier were formed. Conduction velocity in the OEC transplant group was increased in comparison to the microsurgical repair alone, and improved stepping was observed in the transplant group. These results suggest that presentation of OECs at the time of nerve injury enhances regeneration and improves functional outcome. Even a modest improvement in nerve regeneration could have significant clinical implications for reconstructive nerve surgery.