Efforts toward routine islet cell transplantation as a means for reversing type 1 diabetes have been hampered by islet availability as well as allograft rejection. In vitro transdifferentiation of mouse bone marrow (BM)-derived stem (mBMDS) cells into insulin-producing cells could provide an abundant source of autologous cells for this procedure. For this study, we isolated and characterized single cell-derived stem cell lines obtained from mouse BM. In vitro differentiation of these mBMDS cells resulted in populations meeting a number of criteria set forth to define functional insulin-producing cells. Specifically, the mBMDS cells expressed multiple genes related to pancreatic beta-cell development and function (insulin I and II, Glut2, glucose kinase, islet amyloid polypeptide, nestin, pancreatic duodenal homeobox-1 [PDX-1], and Pax6). Insulin and C-peptide production was identified by immunocytochemistry and confirmed by electron microscopy. In vitro studies involving glucose stimulation identified glucose-stimulated insulin release. Finally, these mBMDS cells transplanted into streptozotocin-induced diabetic mice imparted reversal of hyperglycemia and improved metabolic profiles in response to intraperitoneal glucose tolerance testing. These results indicate that mouse BM harbors cells capable of in vitro transdifferentiating into functional insulin-producing cells and support efforts to derive such cells in humans as a means to alleviate limitations surrounding islet cell transplantation.