The direct conversion of carbon dioxide into biofuels by photosynthetic microorganisms is a promising alternative energy solution. In this study, a model cyanobacterium, Synechococcus elongatus PCC 7942, is engineered to produce free fatty acids (FFA), potential biodiesel precursors, via gene knockout of the FFA-recycling acyl-ACP synthetase and expression of a thioesterase for release of the FFA. Similar to previous efforts, the engineered strains produce and excrete FFA, but the yields are too low for large-scale production. While other efforts have applied additional metabolic engineering strategies in an attempt to boost FFA production, we focus on characterizing the engineered strains to identify the physiological effects that limit cell growth and FFA synthesis. The strains engineered for FFA-production show reduced photosynthetic yields, chlorophyll-a degradation, and changes in the cellular localization of the light-harvesting pigments, phycocyanin and allophycocyanin. Possible causes of these physiological effects are also identified. The addition of exogenous linolenic acid, a polyunsaturated FFA, to cultures of S. elongatus 7942 yielded a physiological response similar to that observed in the FFA-producing strains with only one notable difference. In addition, the lipid constituents of the cell and thylakoid membranes in the FFA-producing strains show changes in both the relative amounts of lipid components and the degree of saturation of the fatty acid side chains. These changes in lipid composition may affect membrane integrity and structure, the binding and diffusion of phycobilisomes, and the activity of membrane-bound enzymes including those involved in photosynthesis. Thus, the toxicity of unsaturated FFA and changes in membrane composition may be responsible for the physiological effects observed in FFA-producing S. elongatus 7942. These issues must be addressed to enable the high yields of FFA synthesis necessary for large-scale biofuel production. Biotechnol. Bioeng. 2012;109: 2190–2199. © 2012 Wiley Periodicals, Inc.