We extend the neutral theory of macroecology by deriving biodiversity models (relative species abundance and species-area relationships) in a local community-metacommunity system in which the local community is embedded within the metacommunity. We first demonstrate that the local species diversity patterns converge to that of the metacommunity as the size (scale) of the embedded local community increases. This result shows that in continuous landscapes no sharp boundaries dividing the communities at the two scales exist; they are an artificial distinction made by the current spatially implicit neutral theory. Second, we remove the artificial restriction that speciation cannot occur in a local community, even if the effects of local speciation are small. Third, we introduce stochasticity into the immigration rate, previously treated as constant, and demonstrate that local species diversity is a function not only of the mean but also of the variance in immigration rate. High variance in immigration rates reduces species diversity in local communities. Finally, we show that a simple relationship exists between the fundamental diversity parameter of neutral theory and Simpson's index for local communities. Derivation of this relationship extends recent work on diversity indices and provides a means of evaluating the effect of immigration on estimates of the fundamental diversity parameter derived from relative species abundance data on local communities.