AIMS: To assess and compare costs associated with diabetes and lesser degrees of glucose intolerance in Australia. METHODS: The Australian Diabetes, Obesity and Lifestyle study collected data on the use of health services and health related expenditure in 2004-2005. Complications data were collected through physical examination and biochemical tests or questionnaire. Data were available on 6101 participants. Age- and sex-adjusted direct healthcare costs, direct non-healthcare costs and government subsidies were estimated according to glucose tolerance status. RESULTS: Annual direct per person costs were A$1898 for those with normal glucose tolerance to A$4390 for those with known diabetes. Costs were substantially higher in people with diabetes and both micro- and macrovascular complications. The total annual cost of diabetes in 2005 for Australians aged ≥30 years was A$10.6 billion (A$4.4 billion in direct costs; A$6.2 billion in government subsidies) which equates to A$14.6 billion in 2010 dollars. Total annual excess cost associated with diabetes in 2005 was A$4.5 billion (A$2.2 billion in direct costs; A$2.3 billion in government subsidies). CONCLUSION: The excess cost of diabetes to individuals and government is substantial and is greater in those with complications. Costs could potentially be reduced by preventing the development of diabetes or its complications.