Type I diabetes is associated with bone loss and marrow adiposity. To identify early events involved in the etiology of diabetic bone loss, diabetes was induced in mice by multiple low dose streptozotocin injections. Serum markers of bone metabolism and inflammation as well as tibial gene expression were examined between 1 and 17 days post‐injection (dpi). At 3 dpi, when blood glucose levels were significantly elevated, body, fat pad and muscle mass were decreased. Serum markers of bone resorption and formation significantly decreased at 5 dpi in diabetic mice and remained suppressed throughout the time course. An osteoclast gene, TRAP5 mRNA, was suppressed at early and late time points. Suppression of osteogenic genes (runx2 and osteocalcin) and induction of adipogenic genes (PPARγ2 and aP2) were evident as early as 5 dpi. These changes were associated with an elevation of serum cytokines, but more importantly we observed an increase in the expression of cytokines in bone, supporting the idea that bone, itself, exhibits an inflammatory response during diabetes induction. This inflammation could in turn contribute to diabetic bone pathology. IFN‐γ (one of the key cytokines elevated in bone and known to be involved in bone regulation) deficiency did not prevent diabetic bone pathology. Taken together, our findings indicate that bone becomes inflamed with the onset of T1‐diabetes and during this time bone phenotype markers become altered. However, inhibition of one cytokine, IFN‐γ was not sufficient to prevent the rapid bone phenotype changes. J. Cell. Physiol. 218: 575–583, 2009. © 2008 Wiley‐Liss, Inc.