OBJECTIVE We prospectively examined the relationship between lung function and risk of type-2 diabetes and fatal and nonfatal coronary heart disease (CHD) events and investigated the hypothesis that inflammation may underlie these associations. RESEARCH DESIGN AND METHODS A prospective study of 4,434 men aged 40–59 years with no history of cardiovascular disease (CHD or stroke) or diabetes drawn from general practices in 24 British towns and followed up for 20 years. RESULTS There were 680 major CHD events (276 fatal, 404 nonfatal) and 256 incident type 2 diabetes during the 20 years follow-up. Forced vital capacity (FVC) and forced expiratory volume in 1 s (FEV1) but not FEV1-to-FVC ratio were significantly and inversely associated with incident type 2 diabetes and fatal CHD events (not nonfatal events) after adjustment for age, potential confounders, and metabolic risk factors. The adjusted relative risk (RR) for type 2 diabetes (Quartile 1 vs. Quartile 4) were 1.59 (1.07–2.56) and 1.74 (1.16–2.61) for FVC and FEV1, respectively (P = 0.03 and P = 0.04 for trend). The corresponding RR for fatal CHD were 1.48 (1.00–2.21) and 1.81 (1.19–2.76) (P = 0.002 and P = 0.0003 for trend). Lung function was significantly and inversely associated with C-reactive protein and interleukin-6; the inverse associations with type 2 diabetes for FVC and FEV1 were attenuated after further adjustment for these factors (P = 0.14 and P = 0.11 for trend) but remained significant for fatal CHD (P = 0.03 and P = 0.01, respectively). CONCLUSIONS Restrictive rather than obstructive impairment of lung function is associated with incident type 2 diabetes (and fatal CHD) with both associations partially explained by traditional and metabolic risk factors and inflammation.