Beta cell replacement is a promising approach for treatment of type 1 diabetes; however, it is limited by a shortage of pancreas donors. The pluripotent MSC in adult bone marrow (BM) offer an attractive source of stem cells for generation of surrogate beta cells. BM-MSC can be obtained with relative ease from each patient, allowing potential circumvention of allograft rejection. Here, we report a procedure for expansion of BM-MSC in vitro and their differentiation into insulin-producing cells. The pancreatic duodenal homeobox 1 (Pdx1) gene was expressed in BM-MSC from 14 human donors, and the extent of differentiation of these cells toward the beta-cell phenotype was evaluated. RNA and protein analyses documented the activation of expression of all four islet hormones. However, the cells lacked expression of NEUROD1, a key transcription factor in differentiated beta cells. A significant insulin content, as well as glucose-stimulated insulin release, were demonstrated in vitro. Cell transplantation into streptozotocin-diabetic immunodeficient mice resulted in further differentiation, including induction of NEUROD1, and reduction of hyperglycemia. These findings were reproducible in BM-MSC from 9 of 14 donors of both sexes, ages 19-62. These results suggest a therapeutic potential for PDX1-expressing BM-MSC in beta-cell replacement in patients with type 1 diabetes.