The prevalence of obesity in Western society has reached epidemic proportions and its aetiological role in the development of type 2 diabetes has made finding an effective treatment for the condition of crucial importance. Of the many consequences of obesity, derangements in glucose metabolism present one of the greatest problems to health. While the role of obesity in causing insulin resistance has received much attention, the effect of obesity on beta-cell failure and the consequent development of type 2 diabetes requires re-emphasis. In this review, the current understanding of the effects of elevated free-fatty acids on beta-cell function will be examined, including a discussion of potential mechanisms. In particular, dysregulation of biochemical pathways and alterations in key enzymes, proteins and hormones will be considered as grounds for the progression to a diabetic phenotype.