Recent data increasingly support a complex interplay between the metabolic condition diabetes mellitus and the pathologically defined nonalcoholic fatty liver disease (NAFLD). NAFLD predicts the development of type 2 diabetes and vice versa, and each condition may serve as a progression factor for the other. Although the association of diabetes and NAFLD is likely to be partly the result of a “common soil,” it is also probable that diabetes interacts with NAFLD through specific pathogenic mechanisms. In particular, through interrelated metabolic pathways currently only partly understood, diabetes appears to accelerate the progression of NAFLD to nonalcoholic steatohepatitis, defined by the presence of necroinflammation, with varying degrees of liver fibrosis. In the research setting, obstacles that have made the identification of clinically significant NAFLD, and particularly nonalcoholic steatohepatitis, difficult are being addressed with the use of new imaging techniques combined with risk algorithms derived from peripheral blood profiling. These techniques are likely to be used in the diabetes population in the near future. This review examines the pathogenic links between NAFLD and diabetes by exploring the epidemiological evidence in humans and also through newer animal models. Emerging technology to help screen noninvasively for differing pathological forms of NAFLD and the potential role of preventive and therapeutic approaches for NAFLD in the setting of diabetes are also examined.