The anti-hyperglycemic and immunomodulatory activities of the ethanol extract from Paecilomyces Hepiali Chen (PHC), a Chinese medicine, were investigated in streptozotocin-induced type 1 diabetic (T1DM) mice. Male Balb/c mice, which were i.p. injected with streptozotocin (STZ, 50 mg/kg, for 5 consecutive days) on Day 7, were orally administered saline (the normal control and diabetic control group), Metformin (60 mg/kg, b.w., positive group), or the extract (100 mg/kg, b.w., PHC prevention group) from Day 1 to Day 28, Mice i.p. injected with streptozotocin (STZ, 50 mg/kg, b.w.) for 5 consecutive days prior to PHC treatment (100 mg/kg, b.w.) were used as the PHC treatment group. The effects of PHC on postprandial blood glucose concentrations, plasmatic insulin levels, morphology of pancreatic beta cells and CD4(+) T cells proliferation after 28-day treatment were monitored. Results showed that PHC administered 6 days before STZ induction of diabetes in mice significantly decreased blood glucose level (p < 0.01). An increase of insulin level was also observed as compared to those in the diabetic control group (p < 0.01). In addition, fewer inflammatory cells infiltrated the pancreatic islet and fewer beta cells death by apoptosis within the inflamed islets were observed. More importantly, the CD4(+) T cell proliferation was remarkably attenuated ex vivo in mice preventively treated with PHC (p < 0.01). In comparison to the PHC prevention group, no significant hypoglycemia, changes of insulin level and beta cell protection were observed in mice treated with PHC after STZ administration. Our findings demonstrated that preventive administration of PHC protected beta cells from apoptosis in type 1 diabetes induced by STZ, and the underlying mechanism may be involved in suppressing CD4(+) T cells reaction, reducing inflammatory cells infiltration and protecting beta cell apoptosis in pancreatic islet.