Insulin resistance and beta-cell dysfunction have important roles in the pathogenesis and evolution of type 2 diabetes. The development of precise methods to measure these factors has helped us to define the relationship between them and evidence is reviewed that changes in insulin sensitivity are compensated by inverse changes in beta-cell responsiveness such that the product of insulin sensitivity and insulin secretion (the disposition index) remains constant. While the disposition index promises to be a useful tool to predict individuals at high risk of developing type 2 diabetes, other factors that contribute to beta-cell dysfunction and mark disease onset and progression include impairments in proinsulin processing and insulin secretion, decreased beta-cell mass and islet amyloid deposition. Emerging data indicate that anti-diabetic agents, such as the thiazolidinediones that simultaneously target insulin resistance and beta-cell dysfunction, may have a beneficial impact on disease onset and progression. Several landmark clinical studies are underway to investigate if their initial promise is supported by data from large-scale trials.