Phencyclidine (PCP) is a noncompetitive NMDA receptor antagonist, and it induces schizophreniform cognitive deficits in healthy humans and similar cognitive deficits in rodents. Although the PCP-induced cognitive deficits appear to be accompanied and possibly caused by dysfunction of GABAergic inhibitory interneurons in the prefrontal cortex (PFC), the potential benefit(s) of GABAergic interneuron manipulations on PCP-induced cognitive deficits remains unexplored. In this study we show that when embryonic medial ganglionic eminence (MGE) cells, many of which differentiate into cortical GABAergic interneurons in situ, were grafted into the medial PFC (mPFC) of neonatal mice, they differentiated into a specific class of GABAergic interneurons and became functionally integrated into the host neuronal circuitry in adults. Prior MGE cell transplantation into the mPFC significantly prevented the induction of cognitive and sensory-motor gating deficits by PCP. The preventive effects were not reproduced by either transplantation of cortical projection neuron precursors into the mPFC or transplantation of MGE cells into the occipital cortex. The preventive effects of MGE cell transplantation into the mPFC were accompanied by activation of callosal projection neurons in the mPFC. These findings suggest that increasing GABAergic interneuron precursors in the PFC may contribute to the development of a cell-based approach as a novel means of modulating the PFC neuronal circuitry and preventing schizophreniform cognitive deficits.