Insulin resistance and beta-cell dysfunction, two factors central to the pathogenesis of type 2 diabetes, were studied in relation to the development of diabetes in a group of participants with impaired glucose tolerance in the Diabetes Prevention Program (DPP) at baseline and after specific interventions designed to prevent diabetes. Participants were randomly assigned to placebo (n = 1,082), metformin (850 mg twice a day) (n = 1,073), or intensive lifestyle intervention (n = 1,079). The diabetes hazard rate was negatively associated with baseline insulin sensitivity (hazard rate ratio = 0.62-0.94 per SD difference, depending on treatment group and measure of sensitivity) and with baseline insulin secretion (hazard rate ratio = 0.57-0.76 per SD). Improvements in insulin secretion and insulin sensitivity were associated with lower hazard rates in all treatment arms (hazard rate ratio = 0.46-0.95 per SD increase and 0.29-0.79 per SD increase, respectively). In multivariate models that included the three metabolic variables (changes in body weight, insulin sensitivity, and insulin secretion) each significantly and independently predicted progression to diabetes when adjusted for the other two variables. The intensive lifestyle intervention, which elicited the greatest reduction in diabetes incidence, produced the greatest improvement in insulin sensitivity and the best preservation of beta-cell function after 1 year, whereas the placebo group, which had the highest diabetes incidence, had no significant change in insulin sensitivity and beta-cell function after 1 year. In the metformin group, diabetes risk, insulin sensitivity, and beta-cell function at 1 year were intermediate between those in the intensive lifestyle and placebo groups. In conclusion, higher insulin secretion and sensitivity at baseline and improvements in response to treatment were associated with lower diabetes risk in the DPP. The better preventive effectiveness of intensive lifestyle may be due to improved insulin sensitivity concomitant with preservation of beta-cell function.