Objectives: To address the potential effects of weight loss and physical activity (WL + Ex) on intramyocellular lipid (IMCL) and lipid droplet size in overweight and obese previously sedentary individuals. Research Methods and Procedures: IMCL and lipid droplet size was determined in vastus lateralis, obtained by percutaneous biopsy, from 21 obese volunteers (9 men/12 women), using Oil Red 0 staining, along with succinate dehydrogenase histochemistry and mitochondrial immuno-histochemistry as measures of skeletal muscle oxidative capacity. Insulin sensitivity (IS) was determined by glucose clamp. Results: A 4-month WL + Ex intervention resulted in similar to10% WL and similar to15% increase in maximal oxygen uptake, leading to a 46% increase, in IS (all p < 0.0 1). IMCL did not significantly change (p = 0.36). However, the size of lipid droplets decreased after WL + Ex (p < 0.01), and this decrease in lipid droplet size correlated with increased IS (p < 0.01) and the amount of physical activity (p < 0.05). Succinate dehydrogenase activity and mitochondrial labeling increased significantly (p < 0.01), without a significant shift in fiber type distribution. Discussion: In summary, IMCL does not decrease in response to WL + Ex in obese, previously sedentary individuals, yet the lipid within muscle is dispersed into smaller droplets. This change in the size of lipid droplets, likely coupled with a concomitant increase in oxidative enzyme capacity, is correlated to improved IS.