Recent evidence points toward decreased oxidative capacity and mitochondrial aberrations as a major contributor to the development of insulin resistance and type 2 diabetes. In this article we will provide an integrative view on the interrelation between decreased oxidative capacity, lipotoxicity, and mitochondrial aberrations in type 2 diabetes. Type 2 diabetes is characterized by disturbances in fatty acid metabolism and is accompanied by accumulation of fatty acids in nonadipose tissues. In metabolically active tissues, such as skeletal muscle, fatty acids are prone to so-called oxidative damage. In addition to producing energy, mitochondria are also a major source of reactive oxygen species, which can lead to lipid peroxidation. In particular, the mitochondrial matrix, which contains DNA, RNA, and numerous enzymes necessary for substrate oxidation, is sensitive to peroxide-induced oxidative damage and needs to be protected against the formation and accumulation of lipids and lipid peroxides. Recent evidence reports that mitochondrial uncoupling is involved in the protection of the mitochondrial matrix against lipid-induced mitochondrial damage. Disturbances in this protection mechanism can contribute to the development of type 2 diabetes.