Type 1 diabetes mellitus (T1DM) is a chronic disorder characterized by targeted autoimmune-mediated destruction of the β cells of Langerhans within pancreatic islets. Currently, islet transplantation is the only curative therapy; however, donor shortages and cellular damage during the isolation process critically limit the use of this approach. Here, we describe a method for creating viable and functionally potent islets for successful transplantation by co-culturing single primary islet cells with adipose-derived stem cells (ADSCs) in concave microwells. We observed that the ADSCs segregated from the islet cells, eventually yielding purified islet spheroids in the three-dimensional environment. Thereafter, the ADSC-exposed islet spheroids showed significantly different ultrastructural morphologies, higher viability, and enhanced insulin secretion compared to mono-cultured islet spheroids. This suggests that ADSCs may have a significant potential to protect islet cells from damage during culture, and may be employed to improve islet cell survival and function prior to transplantation. In vivo experiments involving xenotransplantation of microfiber-encapsulated spheroids into a mouse model of diabetes revealed that co-culture-transplanted mice maintained their blood glucose levels longer than mono-culture-transplanted mice, and required less islet mass to reverse diabetes. This method for culturing islet spheroids could potentially help overcome the cell shortages that have limited clinical applications and could possibly be developed into a bioartificial pancreas.