Nano-islands are entities (droplets or other shapes) that are formed by spontaneous dewetting (agglomeration, in the early literature) of thin and very thin metallic (especially gold) films on a substrate, done by post-deposition heating or by using other sources of energy. In addition to thermally generated nano-islands, more recently, nanoparticle films have also been dewetted, in order to form nano-islands. The localized surface plasmon resonance (LSPR) band of gold nano-islands was found to be sensitive to changes in the surrounding environment, making it a suitable platform for sensing and biosensing applications. In this review, we revisit the development of the concept of nano-island(s), the thermodynamics of dewetting of thin metal films, and the effect of the substrate on the morphology and optical properties of nano-islands. A special emphasis is made on nanoparticle films and their applications to biosensing, with ample examples from the authors’ work.