The present study examines the morphological changes occurring in subcutaneous pancreatic tissue grafts (SPTG) and its effect on the host pancreatic islet cells in streptozotocin (STZ)-induced diabetic rats using morphological techniques. SPTG survived after 15 weeks of transplantation. Its acinar cells degenerated but the ducts and endocrine cells survived. The surviving and newly formed pancreatic tubules and endocrine cells filled the spaces left by degenerated acinar cells. Compartmentalization of the surviving parenchymatic tissues was observed, with the pancreatic tubules lying in the periphery of the graft and the endocrine tissue in the inner portion of the graft. Lymphocytes invaded the inner portion of the graft, conglomerating around endocrine cells. It was interesting, however, that, lymphocytes where not observed in the periphery of the grafts where most of the surviving pancreatic tubules lie. In addition to this, necrotic tissues were observed in the inner part of the graft. Fifteen weeks after transplantation into the subcutaneous region, insulin, glucagon, somatostatin and pancreatic polypeptide-immunoreactive cells were observed in many parts of the graft. In the peripheral parts of the grafts, large numbers of pancreatic tubules differentiated into endocrine cells. In conclusion, the ductal and endocrine cells of pancreatic tissue fragments survived in the subcutaneous region of rat with normal pattern of distribution.