Diabetes mellitus is the most common chronic metabolic disease and a major source of morbidity and mortality. Type 2 diabetes (T2D) is by far the most prevalent form of diabetes accounting for around 90% of cases worldwide. In recent years it has become apparent that a diabetes epidemic is unfolding as a result of increasing obesity, sedentary lifestyles and an ageing population. The enormity of the diabetes epidemic raises concern about the total cost to healthcare systems. This study was undertaken to investigate the direct healthcare costs of managing T2D in Ireland. Data was captured on 701 diabetes patients attending four diabetes centres. A bottom-up, prevalence-based design was used, which collected data on hospital resource use and clinical outcome measures over a 12-month period (1999/2000). The study was observational in nature, focusing on usual care of patients with T2D. Although the true prevalence of T2D in Ireland is unknown, conservative estimates are 3.9% for diagnosed diabetes and 6% for both diagnosed and undiagnosed diabetes. Using these figures the annual total direct cost was estimated at 377.2 million euro for diagnosed diabetes and 580.2 million euro for both diagnosed and undiagnosed diabetes. This corresponds to 4.1% and 6.4% of total healthcare expenditure respectively. Hospitalisations were the main driver of costs, accounting for almost half of overall costs, while ambulatory and drug costs accounted for 27% and 25% respectively. Hospitalisation costs were high because 60% of patients had developed complications. The most common microvascular and macrovascular complications were neuropathy and angina respectively. The annual cost of care for patients with microvascular and macrovascular complications were 1.8 and 2.9 times the cost of treating those without clinical evidence of complications respectively. The figure for patients with both types of complications was 3.8. This study shows that T2D is a very costly disease, largely due to the cost of and the management of complications. Many diabetes related complications are preventable, therefore it would appear a cost-effective approach for government to invest in the prevention of T2D and diabetes related complications.