An important goal in advancing islet transplantation for the treatment for type 1 diabetes, is to discover transplantation sites that promote long-term islet engraftment. Here, we investigate the bone marrow cavity in rats as a potential site for islet transplantation. Dark agouti streptozotocin diabetic recipients received DA islets to one of three sites: to the renal subcapsular, intrahepatic or bone marrow cavity site. Assessment of graft function was made by measuring blood glucose concentrations using a wireless continuous glucose monitoring system (CGM), performing a glucose tolerance test (GTT), and histological analysis. To determine if bone tissue secretes factors supportive to islet function and survival, human islets were cultured in the presence of osteoblast conditioned medium. Gene expression, insulin secretion and content were assessed in islets after culture. All transplant recipients with islets transplanted to the bone marrow cavity site had reversal of hyperglycemia and remained diabetes free until the end of the experiment at four months. Mean blood glucose concentrations, glucose variability and GTT, using CGM in recipients, yielded similar results between all transplantation sites. Histological assessments at four months after transplantation showed viable islets within the bone marrow space. Incubation of human islets in the presence of osteoblast conditioned medium resulted in positive changes in gene expression, insulin secretion and content. These positive changes were mediated by osteocalcin which was present in the conditioned medium. In summary, islets transplanted to the bone marrow cavity in diabetic rats showed good engraftment. In addition, the bone marrow cavity may provide an environment that is protective against post-transplant cellular stress thus increasing the chances of long-term islet function and survival.