Bone marrow harbors cells that have the capacity to differentiate into cells of nonhematopoietic tissues of neuronal, endothelial, epithelial, and muscular phenotype. Here we demonstrate that bone marrow–derived cells populate pancreatic islets of Langerhans. Bone marrow cells from male mice that express, using a CRE-LoxP system, an enhanced green fluorescent protein (EGFP) if the insulin gene is actively transcribed were transplanted into lethally irradiated recipient female mice. Four to six weeks after transplantation, recipient mice revealed Y chromosome and EGFP double-positive cells in their pancreatic islets. Neither bone marrow cells nor circulating peripheral blood nucleated cells of donor or recipient mice had any detectable EGFP. EGFP-positive cells purified from islets express insulin, glucose transporter 2 (GLUT2), and transcription factors typically found in pancreatic β cells. Furthermore, in vitro these bone marrow–derived cells exhibit — as do pancreatic β cells — glucose-dependent and incretin-enhanced insulin secretion. These results indicate that bone marrow harbors cells that have the capacity to differentiate into functionally competent pancreatic endocrine β cells and that represent a source for cell-based treatment of diabetes mellitus. The results generated with the CRE-LoxP system also suggest that in vivo cell fusion is an unlikely explanation for the “transdifferentiation” of bone marrow–derived cells into differentiated cell phenotypes.