Insulin resistance is associated with the circulating free fatty acid (FFA) level and intracellular lipid content in muscle and liver. We investigated the effect of 2-wk diet and exercise therapy on total adiposity, circulating FFA, intracellular lipid content in muscle and liver, and peripheral insulin sensitivity. Type 2 diabetic patients were divided into a diet group (n = 7) and a diet plus exercise group (n = 7). We performed a hyperinsulinemic-euglycemic clamp study before and after treatment. Intramyocellular lipid (IMCL) in the tibialis anterior muscle and intrahepatic lipid (IHL) were evaluated by (1)H-magnetic resonance spectroscopy. Fasting FFA were not altered, and total body fat showed a slight, but significant, decrease in both groups after treatment. IMCL was decreased by 19%, and the glucose infusion rate was increased by 57% in the diet plus exercise group, whereas neither IMCL nor glucose infusion rate was significantly altered in the diet group. However, IHL showed a significant decrease in both groups. In summary, we found that 2 wk of diet and exercise decreased IMCL and increased muscle insulin-mediated glucose uptake, whereas diet with or without exercise decreased IHL. These effects were evident despite a small decrease in body fat and were observed independently of fasting FFA levels.