The term lipotoxicity elicits visions of steatotic liver, fat laden skeletal muscles and engorged lipid droplets that spawn a number of potentially harmful intermediates that can wreak havoc on signal transduction and organ function. Prominent among these so-called lipotoxic mediators are signaling molecules such as long chain acyl-CoAs, ceramides and diacyglycerols; each of which is thought to engage serine kinases that disrupt the insulin signaling cascade, thereby causing insulin resistance. Defects in skeletal muscle fat oxidation have been implicated as a driving factor contributing to systemic lipid imbalance, whereas exercise-induced enhancement of oxidative potential is considered protective. The past decade of diabetes research has focused heavily on the foregoing scenario, and indeed the model is grounded in strong experimental evidence, albeit largely correlative. This review centers on mechanisms that connect lipid surplus to insulin resistance in skeletal muscle, as well as those that underlie the antilipotoxic actions of exercise. Emphasis is placed on recent studies that challenge accepted paradigms.