Chronically elevated circulating excess free fatty acids (i.e.lipotoxicity) is a pathological process implicated in several metabolic disorders, including obesity-driven Type 2 diabetes (T2D). Lipotoxicity exerts detrimental effects on pancreatic islet β-cells by reducing glucose-stimulated insulin secretion (GSIS), altering β-cell transcriptional identity, and promoting apoptosis. While β-cell-derived small extracellular vesicles (sEV) have been shown to contribute to β-cell failure in T2D, their specific role in lipotoxicity-mediated β-cell failure remains to be elucidated. In this work, we demonstrate that lipotoxicity enhances the release of sEVs from β-cells, which exhibit altered proteomic and lipidomic profiles. These lipotoxic sEV induce β-cell dysfunction in healthy mouse and human islets and trigger significant islet transcriptional changes, including the upregulation of genes associated with the TGFβ/Smad3 pathway, as noted by RNA sequencing. Importantly, pharmacological inhibition of the TGFβI/II receptor improved lipotoxic sEV-induced β-cell dysfunction, underscoring their involvement in activating the TGFβ/Smad3 pathway during this process. We have comprehensively characterized lipotoxic β-cell sEVs and implicated their role in inducing β-cell functional failure in T2D. These findings highlight potential avenues for therapeutic interventions targeting sEV-mediated pathways to preserve β-cell health in metabolic disorders.Article HighlightsDiabetogenic lipotoxic conditions enhance β-cell sEV release and induce alterations in both protein and lipid content.Global islet transcriptional changes and alterations in β-cell function were noted upon exposure to lipotoxic sEV.Lipotoxic sEV were shown to activate the TGFβ/Smad3 pathway and blockade of this pathway improved β-cell function.