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Aims SB623 cells are human bone marrow stromal cells transfected with Notch1 intracellular domain. In this study, we examined potential regenerative mechanisms underlying stereotaxic transplantation of SB623 cells in rats with experimental acute ischemic stroke. Methods We prepared control group, empty capsule (EC) group, SB623 cell group (SB623), and encapsulated SB623 cell (eSB623) group. Transient middle cerebral artery occlusion (MCAO) was performed on day 0, and 24 h after MCAO, stroke rats received transplantation into the envisioned ischemic penumbra. Modified neurological severity score (mNSS) was evaluated, and histological evaluations were performed. Results In the mNSS, SB623 and eSB623 groups showed significant improvement compared to the other groups. Histological analysis revealed that the infarction area in SB623 and eSB623 groups was reduced. In the eSB623 group, robust cell viability and neurogenesis were detected in the subventricular zone that increased significantly compared to all other groups. Conclusion SB623 cells with or without encapsulation showed therapeutic effects on ischemic stroke. Encapsulated SB623 cells showed enhanced neurogenesis and increased viability inside the capsules. This study reveals the mechanism of secretory function of transplanted SB623 cells, but not cell-cell interaction as primarily mediating the cells' functional benefits in ischemic stroke.