After recently being recognized as a feature of the metabolic syndrome, fatty liver has evolved as a key player in the pathogenesis of dyslipidemia. Development of nonalcoholic fatty liver disease comes from an imbalance between the influx and production of fatty acids and the use of fatty acids for oxidation or secretion as very low density lipoprotein (VLDL) triglycerides. Previously, we have shown a strong relationship between increased liver fat and overproduction of large VLDL particles. We observed recently that in patients with high liver fat, insulin was unable to regulate VLDL production. The result is increased concentrations of VLDL particles in the circulation. Consequently, changes are seen in the metabolism of other lipoproteins that interact with VLDL particles, the net result being decreased high-density lipoprotein cholesterol and increased formation of small, dense low-density lipoprotein. In this article, we review recent findings on the development of fatty liver and its role in the diabetic dyslipidemia pathogenesis.