Free fatty acids (FFAs) exert both positive and negative effects on beta cell survival and insulin secretory function, depending on concentration, duration, and glucose abundance. Lipid signals are mediated not only through metabolic pathways, but also through cell surface and nuclear receptors. Toxicity is modulated by positive signals arising from circulating factors such as hormones, growth factors and incretins, as well as negative signals such as inflammatory mediators and cytokines. Intracellular mechanisms of lipotoxicity include metabolic interference and cellular stress responses such as oxidative stress, endoplasmic reticulum (ER) stress, and possibly autophagy. New findings strengthen an old hypothesis that lipids may also impair compensatory beta cell proliferation. Clinical observations continue to support a role for lipid biology in the risk and progression of both type 1 (T1D) and type 2 diabetes (T2D). This review summarizes recent work in this important, rapidly evolving field.