The widespread epidemics of obesity and type 2 diabetes mellitus (T2DM) suggest that both conditions are closely linked. An increasing body of evidence has shifted our view of adipose tissue from a passive energy depot to a dynamic "endocrine organ" that tightly regulates nutritional balance by means of a complex crosstalk of adipocytes with their microenvironment. Dysfunctional adipose tissue, particularly as observed in obesity, is characterized by adipocyte hypertrophy, macrophage infiltration, impaired insulin signaling, and insulin resistance. The result is the release of a host of inflammatory adipokines and excessive amounts of free fatty acids that promote ectopic fat deposition and lipotoxicity in muscle, liver, and pancreatic beta cells. This review focuses on recent work on how glucose homeostasis is profoundly altered by distressed adipose tissue. A better understanding of this relationship offers the best chance for early intervention strategies aimed at preventing the burden of T2DM.