Fatty liver disease is currently recognized as a common cause of liver test elevation, paralleling the worldwide 'epidemic' of obesity in adults and children. In many clinical practices, there is recognition that liver biopsy evaluation is the only means of diagnosis (or exclusion) of fatty liver disease, as neither laboratory tests nor imaging studies to date can provide complete data related to amount of steatosis, inflammation, liver cell injury, fibrosis, and architectural remodeling. Liver biopsy evaluation also provides a means of 'grading and staging' the lesions of fatty liver disease and of detecting clinically unsuspected processes. Liver biopsy evaluation is often the primary end point in clinical trials of treatment, thus, standardization of diagnosis and methods of grading and staging have become important. In this review, these concepts as well as the pathophysiologic bases for them are discussed.