Neural stem cell (NSC) transplantation is a promising strategy for the treatment of neurological disease and injury. NSC transplants have been documented to exert both neurotrophic and immunomodulatory effects in pathological contexts, but grafted cells frequently remain undifferentiated. The specific interactions between undifferentiated NSCs and the normal host microenvironment are not well understood. To investigate the functional impact of undifferentiated NSCs on host activity, a clonal NSC line (C17.2) was utilized. Network dynamics were monitored post-transplant in acute slices of somatosensory cortex using voltage sensitive dye imaging. Single and repetitive callosal stimuli elicited activity that originated in deep layers, propagated vertically along cortical columns, and spread horizontally across superficial layers. Very high levels of C17.2 engraftment (>25%) interfered with parameters of cortical function, including the amplitude, spatial extent, velocity, and integration of evoked potentials. These levels also raised the current threshold required to activate cortical microcircuitry by ten-fold. Conversely, moderate levels of engraftment (<15%) preserved network properties and induced only subtle changes in facilitation during repetitive stimulation. A binning analysis of cortical activity showed that deep cortical layers were more susceptible to the presence of ectopic NSCs than superficial layers. Pharmacological blockade of GABA-A signaling indicated that inhibition was not the predominant cause of circuit dampening in these layers. Instead, highly engrafted cortices showed a marked depletion in host neurons and associated neuronal metabolites. Microglial activation preceded neuronal loss in the transplanted brain and deactivation with doxycycline exerted a neuroprotective effect. Analysis of C17.2-conditioned supernatants showed they secrete a number of proinflammatory cytokines and chemokines. However, these factors did not induce direct toxicity, but rather enhanced microglial-mediated neuronal apoptosis in vitro via tumor necrosis factor alpha-dependent signaling. Primary NSCs from the postnatal subventricular zone showed similar effects on microglial-mediated cytotoxicity. Together, these results suggest that undifferentiated NSCs possess an inherent capacity to modulate microglial functions which can affect neuronal survivability and activity in the host brain.