Type 2 diabetes is characterized by insulin resistance and impaired insulin secretion. Considerable evidence implicates altered fat topography and defects in adipocyte metabolism in the pathogenesis of type 2 diabetes. In individuals who develop type 2 diabetes, fat cells tend to be enlarged. Enlarged fat cells are resistant to the antilipolytic effects of insulin, leading to day-long elevated plasma free fatty acid (FFA) levels. Chronically increased plasma FFA stimulates gluconeogenesis, induces hepatic and muscle insulin resistance, and impairs insulin secretion in genetically predisposed individuals. These FFA-induced disturbances are referred to as lipotoxicity. Enlarged fat cells also have diminished capacity to store fat. When adipocyte storage capacity is exceeded, lipid 'overflows' into muscle and liver, and possibly the beta-cells of the pancreas, exacerbating insulin resistance and further impairing insulin secretion. In addition, dysfunctional fat cells produce excessive amounts of insulin resistance-inducing, inflammatory and atherosclerosis-provoking cytokines, and fail to secrete normal amounts of insulin-sensitizing cytokines. As more evidence emerges, there is a stronger case for targeting adipose tissue in the treatment of type 2 diabetes. Peroxisome-proliferator activated receptor gamma (PPARgamma) agonists, for example the thiazolidinediones, redistribute fat within the body (decrease visceral and hepatic fat; increase subcutaneous fat) and have been shown to enhance adipocyte insulin sensitivity, inhibit lipolysis, reduce plasma FFA and favourably influence the production of adipocytokines. This article examines in detail the role of adipose tissue in the pathogenesis of type 2 diabetes and highlights the potential of PPAR agonists to improve the management of patients with the condition.