Endothelial dysfunction and increased arterial stiffness occur early in the pathogenesis of diabetic vasculopathy. They are both powerful independent predictors of cardiovascular risk. Advances in non-invasive methodologies have led to widespread clinical investigation of these abnormalities in diabetes mellitus, generating a wealth of new knowledge concerning the mechanisms of vascular dysfunction, risk factor associations and potential treatment targets. Endothelial dysfunction primarily reflects decreased availability of nitric oxide (NO), a critical endothelium-derived vasoactive factor with vasodilatory and anti-atherosclerotic properties. Techniques for assessing endothelial dysfunction include ultrasonographic measurement of flow-mediated vasodilatation of the brachial artery and plethysmography measurement of forearm blood flow responses to vasoactive agents. Arterial stiffness may be assessed using pulse wave analysis to generate measures of pulse wave velocity, arterial compliance and wave reflection. The pathogenesis of endothelial dysfunction in type 2 diabetes is multifactorial, with principal contributors being oxidative stress, dyslipidaemia and hyperglycaemia. Elevated blood glucose levels drive production of reactive oxidant species (ROS) via multiple pathways, resulting in uncoupling of mitochondrial oxidative phosphorylation and endothelial NO synthase (eNOS) activity, reducing NO availability and generating further ROS. Hyperglycaemia also contributes to accelerated arterial stiffening by increasing formation of advanced glycation end-products (AGEs), which alter vessel wall structure and function. Diabetic dyslipidaemia is characterised by accumulation of triglyceride-rich lipoproteins, small dense low-density lipoprotein (LDL) particles, reduced high-density lipoprotein (HDL)-cholesterol and increased postprandial free fatty acid flux. These lipid abnormalities contribute to increasing oxidative stress and may directly inhibit eNOS activity. Although lipid-regulating agents such as HMG-CoA reductase inhibitors (statins), fibric acid derivatives (fibrates) and fish oils are used to treat diabetic dyslipidaemia, their impact on vascular function is less clear. Studies in type 2 diabetes have yielded inconsistent results, but this may reflect sampling variation and the potential over-riding influence of oxidative stress, dysglycaemia and insulin resistance on endothelial dysfunction. Results of positive intervention trials suggest that improvement in vascular function is mediated by both lipid and non-lipid mechanisms, including anti-inflammatory, anti-oxidative and direct effects on the arterial wall. Other treatments, such as renin-angiotensin-aldosterone system antagonists, insulin sensitisers and lifestyle-based interventions, have shown beneficial effects on vascular function in type 2 diabetes. Novel approaches, targeting eNOS and AGEs, are under development, as are new lipid-regulating therapies that more effectively lower LDL-cholesterol and raise HDL-cholesterol. Combination therapy may potentially increase therapeutic efficacy and permit use of lower doses, thereby reducing the risk of adverse drug effects and interactions. Concomitant treatments that specifically target oxidative stress may also improve endothelial dysfunction in diabetes. Vascular function studies can be used to explore the therapeutic potential and mechanisms of action of new and established interventions, and provide useful surrogate measures for cardiovascular endpoints in clinical trials.