Type 1 diabetes (T1D) mellitus is characterized by progressive autoimmune destruction of insulin producing beta-cells of the pancreatic islets of Langerhans. Cure of the disease will require control of autoimmunity to halt the destruction of beta-cells in the pancreas and restoration of beta-cell mass. We have built on the success of preclinical and clinical trials of anti-CD3 antibody treatment in modulating the immune response of T1D by the induction of tolerance and combined this treatment, using the nonobese diabetic mouse model, with a transplantation approach using fetal pancreatic anlagen as a source of beta-cell precursor or progenitor cells. Here we report that transplantation of pancreatic anlagen into diabetic nonobese diabetic mice rendered tolerant to the autoimmune process by treatment with anti-CD3 antibody resulted in long-term recovery from diabetes with restored metabolic control. Using a green fluorescent protein marker that made it possible to unequivocally identify the cells derived from the transplanted tissue, we show that the transplanted anlagen cells migrate to the host pancreas and provide a major source of insulin leading to restoration of normal glucose tolerance. Our results contrast with other studies that showed restoration of endogenous islets after infusion of spleen cells in mice treated with Freund's complete adjuvant and suggest that pancreatic fetal tissue has a tropism for the pancreatic site. This study suggests a novel mechanism of beta-cell restoration by the migration of precursor cells or their progeny to the host pancreas and highlights the feasibility of using pancreatic precursors in combination with immune modulation as a treatment to effect long-term remission of T1D.