Traditionally, in vitro stem cell systems have used oxygen tensions that are far removed from the in vivo situation. This is particularly true for the central nervous system, where oxygen (O2) levels range from 8% at the pia to 0.5% in the midbrain, whereas cells are usually cultured in a 20% O2 environment. Cell transplantation strategies therefore typically introduce a stress challenge at the time of transplantation as the cells are switched from 20% to 3% O2 (the average in adult organs). We have modeled the oxygen stress that occurs during transplantation, demonstrating that in vitro transfer of neonatal rat cortical neural precursor cells (NPCs) from a 20% to a 3% O2 environment results in significant cell death, whereas maintenance at 3% O2 is protective. This survival benefit translates to the in vivo environment, where culture of NPCs at 3% rather than 20% O2 approximately doubles survival in the immediate post-transplantation phase. Furthermore, NPC fate is affected by culture at low, physiological O2 tensions (3%), with particularly marked effects on the oligodendrocyte lineage, both in vitro and in vivo. We propose that careful consideration of physiological oxygen environments, and particularly changes in oxygen tension, has relevance for the practical approaches to cellular therapies.