Transplantation of mature islets into portal vein has been most effective thus far, although attrition of transplanted islets constitutes a major limitation, and alternative approaches are required. We analyzed the mechanisms by which islets engrafted, vascularized and functioned over the long term in the small intestinal submucosa. To determine engraftment, survival and function, 350 syngenic islets were transplanted into either intestinal segments or portal vein of diabetic rats. Islet reorganization, vascularization and function were analyzed by histological analysis, RT-PCR analysis as well as glycemic control over up to 1 year. Transplantation of syngeneic islets in marginal numbers successfully restored normoglycemia in diabetic rats. Transplantation of semi-pure islet preparation did not impair their engraftment, vascularization and function. Islets were morphologically intact and expressed insulin as well as glucagon over the year. Expression of angiogenic genes permitted revascularization of transplanted islets. We identified the expression of transcription factors required for maintenance of beta cells. These studies demonstrated that marginal mass of transplanted islets was sufficient to restore euglycemia in streptozotocin-treated rats. These superior results were obtained despite use of an impure preparation of islets in animals with small intestinal segment. Our findings will help advance new horizons for cell therapy in patients with diabetes.