Uteroplacental insufficiency resulting in fetal growth retardation is a common complication of pregnancy and a significant cause of perinatal morbidity and mortality. Epidemiological studies show an increased incidence of type 2 diabetes in humans who were growth retarded at birth. The mechanisms by which an abnormal intrauterine milieu leads to the development of diabetes in adulthood are not known. Therefore, a rat model of uteroplacental insufficiency was developed; intrauterine growth-retarded (IUGR) rats develop diabetes with a phenotype similar to that observed in the human with type 2 diabetes. We show here that administration of a pancreatic beta-cell trophic factor, exendin-4 (Ex-4), during the prediabetic neonatal period dramatically prevents the development of diabetes in this model. This occurs because neonatal Ex-4 prevents the progressive reduction in insulin-producing beta-cell mass that is observed in IUGR rats over time. Expression of PDX, a critical regulator of pancreas development and islet differentiation, is restored to normal levels, and islet beta-cell proliferation rates are normalized by the neonatal Ex-4 treatment. These results indicate that exposure to Ex-4 in the newborn period reverses the adverse consequences of fetal programming and prevents the development of diabetes in adulthood.