Type 2 diabetes (T2D) is characterized by insulin resistance and impaired insulin secretion from pancreatic β-cells. Inflammatory cytokines, including tumour necrosis factor-α (TNF-α), have been shown to promote insulin resistance, and altered expression of cytokines (adipokines) in obese adipose tissue is thought to be an important link between obesity and insulin resistance. It is also becoming clear that inflammation plays a key role in the development of β-cell dysfunction. Inflammatory changes, including accumulation of macrophages, have been documented in T2D islets. Moreover, therapeutic inhibition of interleukin-1β (IL-1β) ameliorates β-cell dysfunction in humans. This review summarizes current understanding of the molecular mechanisms underlying inflammation within islets and its relation to β-cell dysfunction in T2D. A particular focus is on the physiological and pathological functions of macrophages within islets.