OBJECTIVE: To determine the incidence of type 2 diabetes mellitus (T2DM) in 2001-2006 in young people < 19 years and the characteristics of T2DM in the Indigenous group. DESIGN AND SETTING: Prospective population-based incidence study, New South Wales. PARTICIPANTS: Primary ascertainment was from the Australasian Paediatric Endocrine Group NSW Diabetes Register, with secondary ascertainment from the National Diabetes Register (Australian Institute of Health and Welfare). MAIN OUTCOME MEASURES: Incidence of T2DM in young people in NSW; incidence of T1DM and T2DM in Indigenous young people; characteristics at diagnosis. RESULTS: There were 128 incident cases of T2DM (62 boys, 66 girls) in the study period. The median age at diagnosis was 14.5 years (interquartile range, 13.0-16.4), and 90% were overweight or obese (body mass index > 85th percentile for age). Mean annual incidence was 2.5/100,000 person-years (95% CI, 2.1-3.0) in 10-18-year-olds. Of the ethnic groups represented, white Australian comprised 29%, Indigenous 22%, Asian 22%, North African/Middle Eastern 12% and Māori/Polynesian/Melanesian 10%. The incidence of T2DM was significantly higher in the Indigenous than the non-Indigenous group (incidence rate ratio, 6.1; 95% CI, 3.9-9.7; P<0.001), but incidence rates of T1DM were similar (15.5 v 21.4/100,000, respectively). CONCLUSIONS: T2DM accounts for 11% of incident cases of diabetes in 10-18-year-olds, and the majority are overweight or obese. The high rate among Indigenous Australian children supports screening for T2DM in this population.