Type 2 diabetes is caused by genetic and environmental factors that affect the ability of the organism to respond to insulin. This impairment results from decreased insulin action in target tissues and insulin production in beta cells. Genetic factors play a key role in the development of type 2 diabetes. However, the inheritance of diabetes is non-Mendelian in nature because of genetic heterogeneity, polygenic pathogenesis, and incomplete penetrance. Novel insight into this complex process has been obtained from 'designer' mice bearing targeted mutations in genes of the insulin action and insulin secretion pathways. These mutant mice are beginning to challenge established paradigms in the pathogenesis of type 2 diabetes and to shed light on the genetic interactions underlying its complex inheritance. Here we review recent progress in the field and assess its relevance to the pathogenesis of diabetes in humans.