Insulin resistance states as found in type 2 diabetes and obesity are frequently associated with hyperlipidemia. Both stimulatory and detrimental effects of free fatty acids (FFA) on pancreatic beta cells have long been recognized. Acute exposure of the pancreatic beta cell to both high glucose concentrations and saturated FFA results in a substantial increase of insulin release, whereas a chronic exposure results in desensitization and suppression of secretion. Reduction of plasma FFA levels in fasted rats or humans severely impairs glucose-induced insulin release but palmitate can augment insulin release in the presence of nonstimulatory concentrations of glucose. These results imply that changes in physiological plasma levels of FFA are important for regulation of beta-cell function. Although it is widely accepted that fatty acid (FA) metabolism (notably FA synthesis and/or formation of LC-acyl-CoA) is necessary for stimulation of insulin secretion, the key regulatory molecular mechanisms controlling the interplay between glucose and fatty acid metabolism and thus insulin secretion are not well understood but are now described in detail in this review. Indeed the correct control of switching between FA synthesis or oxidation may have critical implications for beta-cell function and integrity both in vivo and in vitro. LC-acyl-CoA (formed from either endogenously synthesized or exogenous FA) controls several aspects of beta-cell function including activation of certain types of PKC, modulation of ion channels, protein acylation, ceramide- and/or NO-mediated apoptosis, and binding to and activating nuclear transcriptional factors. The present review also describes the possible effects of FAs on insulin signaling. We have previously reported that acute exposure of islets to palmitate up-regulates some key components of the intracellular insulin signaling pathway in pancreatic islets. Another aspect considered in this review is the potential source of fatty acids for pancreatic islets in addition to supply in the blood. Lipids can be transferred from leukocytes (macrophages) to pancreatic islets in coculture. This latter process may provide an additional source of FAs that may play a significant role in the regulation of insulin secretion.