We have demonstrated in our previous studies that ventral subicular lesion induces neurodegeneration of the hippocampus and produces cognitive impairment in rats. In the present study, the efficacy of transplanted green fluorescent protein (GFP)-labeled hippocampal cell line (H3-GFP) cells in establishing functional recovery in ventral subicular lesioned rats has been evaluated. The survival of H3-GFP transplants and their ability to express trophic factors in vivo were also investigated. Adult male Wistar rats were subjected to selective lesioning of ventral subiculum and were transplanted with H3-GFP cells into the cornu ammonis 1 (CA1) hippocampus. The transplants settled mainly in the dentate gyrus and expressed neurotrophic factors, brain-derived neurotrophic factor (BDNF), and basic fibroblast growth factor (bFGF). The ventral subicular lesioned (VSL) rats with H3-GFP transplants showed enhanced expression of BDNF in the hippocampus and performed well in eight-arm radial maze and Morris water maze tasks. The VSL rats without hippocampal transplants continued to show cognitive impairment in task learning. The present study demonstrated the H3-GFP transplants mediated recovery of cognitive functions in VSL rats. Our study supports the notion of graft meditated host regeneration and functional recovery through trophic support, although these mechanisms require further investigation.