Peroxisome proliferator-activated receptor-gamma (PPARgamma) is a nuclear hormone receptor that functions as a transcriptional regulator in a variety of tissues. PPARgamma activation, e.g., through binding of the synthetic glitazones or thiazolidinediones (TZD), results in a marked improvement in type 2 diabetic patients of insulin and glucose parameters resulting from an improvement of whole body insulin sensitivity. The role of different metabolic tissues (fat, skeletal muscle, liver) in mediating PPARgamma function in glucose and insulin homeostasis is still unclear. Recently, the function of PPARgamma in adipose tissue and skeletal muscle has been intensively characterized by using targeted deletion of PPARgamma in those tissues. In those studies, adipose PPARgamma has been identified as an essential mediator for the maintainance of whole body insulin sensitivity. Two major mechanisms have been described. 1) Adipose PPARgamma protects nonadipose tissue against excessive lipid overload and maintains normal organ function (liver, skeletal muscle); and 2) adipose PPARgamma guarantees a balanced and adequate production of secretion from adipose tissue of adipocytokines such as adiponectin and leptin, which are important mediators of insulin action in peripheral tissues. In contrast to studies in adipose-specific PPARgamma-deficient mice, the data in muscle-specific PPARgamma(-/-) mice demonstrate that whole body insulin sensitivity is, at least in part, relying on an intact PPARgamma system in skeletal muscle. Finally, these early and elegant studies using tissue-specific PPARgamma knockout mouse models pinpoint adipose tissue as the major target of TZD-mediated improvement of hyperlipidemia and insulin sensitization.