BACKGROUND: Worsening drug resistance in Plasmodium falciparum malaria is a major threat to health in tropical countries. We did a prospective study of malaria incidence and treatment in an area of highly multidrug-resistant P. falciparum malaria. METHODS: We assessed incidence of P. falciparum malaria and the in-vivo responses to mefloquine treatment over 13 years in two large camps for displaced Karen people on the northwest border of Thailand. During this time, the standard mefloquine dose was first increased, and then combined artesunate and mefloquine was introduced as first-line treatment for uncomplicated P. falciparum malaria. FINDINGS: Early detection and treatment controlled P. falciparum malaria initially while mefloquine was effective (cure rate with mefloquine [15 mg/kg] and sulphadoxine-pyrimethamine in 1985, 98% [95% CI 97-100]), but as mefloquine resistance developed, the cure rate fell (71% [67-77] in 1990). A similar pattern was seen for high-dose (25 mg/kg) mefloquine monotherapy from 1990-94. Since the general deployment of the artesunate-mefloquine combination in 1994, the cure rate increased again to almost 100% from 1998 onwards, and there has been a sustained decline in the incidence of P. falciparum malaria in the study area. In-vitro susceptibility of P. falciparum to mefloquine has improved significantly (p=0.003). INTERPRETATION: In this area of low malaria transmission, early diagnosis and treatment with combined artesunate and mefloquine has reduced the incidence of P. falciparum malaria and halted the progression of mefloquine resistance. We recommend that antimalarial drugs should be combined with artemisinin or a derivative to protect them against resistance.