Inflammatory licensed mesenchymal stem cells (MSCs) have the ability to promote functional tissue repair. This study specifically sought to understand how the recipient tissue environment reciprocally affects MSC function. Inflammatory polarized macrophages, modeling an injured tissue environment, were exposed to licensed MSCs, and the resultant effects of MSC immunomodulation and functionality of the MSC secretome on chondrocyte homeostasis were studied. Inflammatory licensed MSCs were generated through priming with either IFN-γ or polyinosinic:polycytidylic acid (poly I:C). Macrophages were polarized to an inflammatory phenotype using IFN-γ. Licensed MSCs were co-cultured with inflammatory macrophages and immunomodulation of MSCs was assessed in a T-cell proliferation assay. MSC gene expression was analyzed for changes in immunogenicity (MHC-I, MHC-II), immunomodulation (IDO, PTGS2, NOS2, TGF-β1), cytokine (IL-6, IL-8), and chemokine (CCL2, CXCL10) expression. Macrophages were assessed for changes in cytokine (IL-6, IL-10, TNF-α, IFN-γ) and chemokine (CCL2, CXCL10) expression. Conditioned medium representing the secretome from IFN-γ or poly I:C-primed MSCs was applied to IL-1β-stimulated chondrocytes, which were analyzed for catabolic (IL-6, TNF-α, CCL2, CXCL10, MMP-13, PTGS2) and matrix synthesis (ACAN, COL2A1) genes. IFN-γ-primed MSCs had a superior ability to suppress T-cell proliferation compared to naïve MSCs, and this ability was maintained following exposure to proinflammatory macrophages. In naïve and licensed MSCs exposed to inflammatory macrophages, MHC-I and MHC-II gene expression was upregulated. The secretome from licensed MSCs was chondroprotective and downregulated inflammatory gene expression in IL-1β-stimulated chondrocytes. In-vitro inflammatory licensing agents enhanced the immunomodulatory ability of MSCs exposed to inflammatory macrophages, and the resultant secretome was biologically active, protecting chondrocytes from catabolic stimulation. Use of licensing agents produced a more consistent immunomodulatory MSC population compared to exposure to inflammatory macrophages. The clinical implications of this study are that in-vitro licensing prior to therapeutic application could result in a more predictable immunomodulatory and reparative response to MSC therapy compared to in-vivo inflammatory licensing by the recipient environment.