There are conflicting data regarding the effects of transplantation of bone marrow-derived cells (BMDCs) on the severity of diabetes. We therefore inquired whether the competence of BMDCs is preserved on adoptive transfer into diabetic (db/db) mice and how the adoptive transfer of BMDCs affects vascular and metabolic abnormalities in these mice. Recipient db/db mice received infusions of BMDCs prepared from either db/db or non-diabetic heterozygout mice (db/m) mice and effects on endothelium-dependent relaxation, insulin sensitivity, and renal function were evaluated. Recipients of BMDCs from db/m, but not db/db donors showed better glucose control, exhibited striking improvement in endothelium-dependent relaxation in response to acetylcholine, and had partially restored renal function. Improved glucose control was due to enhanced insulin sensitivity, most likely secondary to improved vascular function. Enhanced apoptosis of endothelial progenitor cells under oxidative stress, as well as decreased endothelial progenitor cell numbers were responsible for the apparent functional incompetence of BMDCs from db/db donors. Treatment of db/db mice with Ebselen restored the resistance of both BMDCs and endothelial progenitor cells to oxidative stress, improved acetylcholine-induced vasorelaxation, and reduced proteinuria in db/db recipients of BMDC transplantation. In conclusion, infusion of BMDCs obtained from db/m donors to db/db recipient mice benefited macrovascular function, insulin sensitivity, and nephropathy. BMDCs obtained from db/db mice were functionally incompetent secondary to the increased proportion of apoptotic cells on oxidative stress challenge; their competence was restored by Ebselen therapy.