Examined the initial impact and subsequent adjustment to the diagnosis of insulin-dependent diabetes mellitus (IDDM). Children between 1 and 14 years of age and their families were assessed several weeks after diagnosis and again a year later using standardized measures of child behavior, parental mental health, and family functioning. Immediately after diagnosis, the children and both parents exhibited mild symptoms of psychological distress but these had largely resolved at 12-month follow-up. The impact of IDDM diagnosis on family functioning varied with informant, SES, and the age of the child, with an overall tendency for families to become less flexible over the year. Findings suggest that most children and their parents exhibit satisfactory individual adjustment after a period of initial stress but family functioning is affected in complex ways. Serial follow-up of the cohort is planned to establish whether the current findings are predictive of longer term outcome.