The hallmarks of type 2 diabetes are impaired insulin action in peripheral tissues and decreased pancreatic beta-cell function. Classically, the two defects have been viewed as separate entities, with insulin resistance arising primarily from impaired insulin-dependent glucose uptake in skeletal muscle, and beta-cell dysfunction arising from impaired coupling of glucose sensing to insulin secretion. Targeted mutagenesis and transgenesis involving components of the insulin action pathway have changed our understanding of these phenomena. It appears that the role of insulin signaling in the pathogenesis of type 2 diabetes has been overestimated in classic insulin target tissues, such as skeletal muscle, whereas it has been overlooked in liver, pancreatic beta-cells, and brain, which had been thought not to be primary insulin targets. We review recent progress and try to reconcile areas of apparent controversy surrounding insulin signaling in skeletal muscle and pancreatic beta-cells.