We provide the first comprehensive analysis of the extracellular matrix (ECM) composition of peri-islet capsules, composed of the peri-islet basement membrane (BM) and subjacent interstitial matrix (IM), in development of type 1 diabetes in NOD mice and in human type 1 diabetes. Our data demonstrate global loss of peri-islet BM and IM components only at sites of leukocyte infiltration into the islet. Stereological analyses reveal a correlation between incidence of insulitis and the number of islets showing loss of peri-islet BM versus islets with intact BMs, suggesting that leukocyte penetration of the peri-islet BM is a critical step. Protease- and protease inhibitor-specific microarray analyses (CLIP-CHIP) of laser-dissected leukocyte infiltrated and noninfiltrated pancreatic islets and confirmatory quantitative real time PCR and protein analyses identified cathepsin S, W, and C activity at sites of leukocyte penetration of the peri-islet BM in association with a macrophage subpopulation in NOD mice and human type 1 diabetic samples and, hence, potentially a novel therapeutic target specifically acting at the islet penetration stage. Interestingly, the peri-islet BM and underlying IM are reconstituted once inflammation subsides, indicating that the peri-islet BM-producing cells are not lost due to the inflammation, which has important ramifications to islet transplantation studies.