Most obese individuals have elevated plasma levels of free fatty acids (FFA) which are known to cause peripheral (muscle) insulin resistance. They do this by inhibiting insulin-stimulated glucose uptake and glycogen synthesis. The mechanism involves intramyocellular accumulation of diacylglycerol and activation of protein kinase C. FFAs also cause hepatic insulin resistance. They do this by inhibiting insulin-mediated suppression of glycogenolysis. On the other hand, FFAs support between 30 and 50% of basal insulin secretion and potentiate glucose-stimulated insulin secretion. The insulin stimulatory action of FFAs is responsible for the fact that the vast majority (∼ 80%) of obese insulin resistant people do not develop type 2 diabetes. They are able to compensate for their FFA mediated insulin resistance with increased FFA mediated insulin secretion. Individuals who are unable to do this (probably for genetic reasons) eventually develop type 2 diabetes. FFAs have recently been shown to activate the IκB/NFκB pathway which is involved in many inflammatory processes. Thus, elevated plasma levels of FFAs are not only a major cause of insulin resistance in skeletal muscle and liver but may, in addition, play a role in the pathogenesis of coronary artery disease.