The innate immune system of insects is divided into humoral defenses that include the production of soluble effector molecules and cellular defenses like phagocytosis and encapsulation that are mediated by hemocytes. This review summarizes current understanding of the cellular immune response. Insects produce several terminally differentiated types of hemocytes that are distinguished by morphology, molecular and antigenic markers, and function. The differentiated hemocytes that circulate in larval or nymphal stage insects arise from two sources: progenitor cells produced during embryogenesis and mesodermally derived hematopoietic organs. Regulation of hematopoiesis and hemocyte differentiation also involves several different signaling pathways. Phagocytosis and encapsulation require that hemocytes first recognize a given target as foreign followed by activation of downstream signaling and effector responses. A number of humoral and cellular receptors have been identified that recognize different microbes and multicellular parasites. In turn, activation of these receptors stimulates a number of signaling pathways that regulate different hemocyte functions. Recent studies also identify hemocytes as important sources of a number of humoral effector molecules required for killing different foreign invaders.