Immune responses are suppressed in immunologically privileged sites, which may provide a unique opportunity to prolong allograft survival. However, it is unknown whether testicular immune privilege promotes transplantation tolerance. Mechanisms underlying immune privilege are also not well understood. Here we found that islet transplantation in the testis, an immunologically privileged site, generates much less memory CD8+ T cells but induces more Ag-specific CD4+ CD25+ regulatory T cells than in a conventional site. These CD4+ CD25+ cells exhibited the suppression of alloimmune responses in vivo and in vitro. Despite the immune regulation, intratesticular islet allografts all were rejected within 42 days after transplantation although they survived longer than renal subcapsular islet allografts. However, blocking CD40/CD40L costimulation induced the tolerance of intratesticular, but not renal subcapsular, islet allografts. Tolerance to intratesticular islet allografts spread to skin allografts in the non-privileged sites. Either transfer of memory CD8+ T cells or deletion of CD25+ T cells in vivo broke islet allograft tolerance. Thus, transplantation tolerance requires both costimulatory blockade, which suppresses acute allograft rejection, and a favorable balance between memory and regulatory T cells that could favorably prevent late allograft failure. These findings reveal novel mechanisms of immune privilege and provide direct evidence that testicular immune privilege fosters the induction of transplantation tolerance to allografts in both immunologically privileged and non-privileged sites.