The primary genetic, environmental, and metabolic factors responsible for causing insulin resistance and pancreatic beta-cell failure and the precise sequence of events leading to the development of type 2 diabetes are not yet fully understood. Abnormalities of triglyceride storage and lipolysis in insulin-sensitive tissues are an early manifestation of conditions characterized by insulin resistance and are detectable before the development of postprandial or fasting hyperglycemia. Increased free fatty acid (FFA) flux from adipose tissue to nonadipose tissue, resulting from abnormalities of fat metabolism, participates in and amplifies many of the fundamental metabolic derangements that are characteristic of the insulin resistance syndrome and type 2 diabetes. It is also likely to play an important role in the progression from normal glucose tolerance to fasting hyperglycemia and conversion to frank type 2 diabetes in insulin resistant individuals. Adverse metabolic consequences of increased FFA flux, to be discussed in this review, are extremely wide ranging and include, but are not limited to: 1) dyslipidemia and hepatic steatosis, 2) impaired glucose metabolism and insulin sensitivity in muscle and liver, 3) diminished insulin clearance, aggravating peripheral tissue hyperinsulinemia, and 4) impaired pancreatic beta-cell function. The precise biochemical mechanisms whereby fatty acids and cytosolic triglycerides exert their effects remain poorly understood. Recent studies, however, suggest that the sequence of events may be the following: in states of positive net energy balance, triglyceride accumulation in "fat-buffering" adipose tissue is limited by the development of adipose tissue insulin resistance. This results in diversion of energy substrates to nonadipose tissue, which in turn leads to a complex array of metabolic abnormalities characteristic of insulin-resistant states and type 2 diabetes. Recent evidence suggests that some of the biochemical mechanisms whereby glucose and fat exert adverse effects in insulin-sensitive and insulin-producing tissues are shared, thus implicating a diabetogenic role for energy excess as a whole. Although there is now evidence that weight loss through reduction of caloric intake and increase in physical activity can prevent the development of diabetes, it remains an open question as to whether specific modulation of fat metabolism will result in improvement in some or all of the above metabolic derangements or will prevent progression from insulin resistance syndrome to type 2 diabetes.