Background: The prevalence of type 2 diabetes (DM) in children is disturbingly increasing in parallel with the increasing childhood obesity. Better knowledge regarding the pathophysiology of type 2 DM in children is paramount to devise an effective management plan. Objective: Discuss the pathophysiology of type 2 DM in children and adolescents. Methods and Results: This is a comprehensive review of the literature on this topic. Type 2 DM in childhood is viewed as a continuum of insulin resistance (IR) which is determined by an underlying genetic predisposition, intrauterine environment, excessive food consumption, continued rapid weight gain, and poor lifestyle. Besides IR, this is compounded by multiple metabolic defects including β-cell dysfunction and inadequate insulin secretion, α-cell dysfunction, hyperglucagonemia and increased hepatic glucose production, lipotoxicity, inflammation, deficiencies in incretin production and action, and increased renal glucose reabsorption. The confluence of genetic and environmental factors underscores the complexity in disease progression. Conclusion: A consistent single risk factor for type 2 DM is obesity and related IR and therefore it is essential to curtail the progression of obesity. It is important to investigate the role of stringent dietary and nutritional approaches, medications that enhance β-cell function and insulin sensitivity.