The development of type 2 diabetes is linked to insulin resistance coupled with a failure of pancreatic B-cells to compensate by adequate insulin secretion. Here, we review studies obtained from genetically engineered mice that have helped dissect the pathophysiology of this disease. Transgenic/knockout models with monogenic impairment in insulin action and insulin secretion have highlighted potential molecular mechanisms for insulin resistance and suggested a mechanism for the development of MODY in humans. Polygenic models have strengthened the idea that minor defects in insulin secretion and insulin action, when combined, can lead to diabetes, pointing out the importance of interactions of different genetic loci in the production of diabetes. Tissue-specific knockouts of the insulin receptor have challenged current concepts on the regulation of glucose homeostasis and have highlighted the importance of insulin action in pancreatic B-cells and brain. The impact of the genetic background on insulin action, insulin secretion and the incidence of diabetes is also evident in these models. These findings highlight potential new therapeutic targets in the treatment of type 2 diabetes.