This was originally a post that I made to one of the forum threads here on MFP, but there's so much to it, and I like it as a reference enough, that I thought I'd be worth posting here, too (I also seem to have earned a reputation around these parts for my lengthy - though informational - forum posts, and figured I'd collect some of my favorites here, so they don't get lost in forum-land).
The Elevator Pitch on How Metformin Works
Metformin works by increasing the liver's sensitivity to insulin. Most women with PCOS are also insulin resistant and have high insulin levels (note - this is different than blood glucose levels, and while they're typically linked, it's possible to have a normal fasting glucose and a high fasting insulin). By increasing the liver's sensitivity to insulin, it doesn't take as much to tell it to stop producing glucose and releasing it into the blood. With less glucose in the blood, the pancreas doesn't need to pump out more insulin to keep your blood sugar from going too high.
The Role of Insulin in the Body
Insulin is a "multifunction" hormone. The most well-known function is its role in regulating blood sugar, keeping it from going to high after eating. What it also does, and what most people don't know, is that it's also a "traffic cop" and "keymaster" hormone for energy storage.
The body stops burning fat when insulin levels are high, because high insulin levels (are supposed to) mean that food is being processed and needs to be shuttled to the cells to be used, first (both protein and carbs both cause an insulin response, fat doesn't as much; this is why low-carb/high-fat often works for women with PCOS). In people who are insulin resistant, the cells don't react to the presence of insulin until the levels get higher, so at lower levels they say "no I don't need these nutrients," but simultaneously say "I need fuel!" and the insulin shuttles the nutrients off to the liver to be stored as fat, while the pancreas creates more insulin to try to force nutrients into the cells.
In a normally-functioning system, once the food is processed, the insulin levels should drop, which then signals to the body that it should switch to burning body fat whenever it needs fuel. However, in people with a high fasting insulin, if that level is high enough to signal to the body that there's still food to be burned, the body won't go after the fat stores for energy, making weight loss extraordinarily difficult. High insulin levels also stimulate cholesterol production by the body (cholesterol plays a role in cell signaling and nutrient absorption, but the wrong ratios increase your risk for cardiovascular issues; note - dietary cholesterol has little effect on blood cholesterol, the body makes what it (thinks it) needs).
Interestingly, the diabetic state of impaired insulin secretion prompts fat loss. This is why one of the symptoms of both types of Diabetes is weight loss (T1 Diabetics can't make their own insulin, and some T2 Diabetics have burnt out their prancreas's ability to make insulin, resulting in a deficiency of insulin), and why Diabetics often gain weight when taking insulin. (Fun fact - there is actually a type of eating disorder among Diabetes sufferers called Diabulimia, where a Diabetic will stop taking insulin in order to lose weight.)
Back to Metformin
Metformin works by increasing the liver's sensitivity to insulin (some research I found suggest that it actually takes over the communication channels), keeping it from producing too much glucose (which, in turn, tells the pancreas to reduce the production of insulin), resulting in a controlled deficiency of insulin, which ultimately lowers the amount of insulin in the bloodstream, and again prompting the body to burn its fat stores. There's also evidence that fat secretes estrogen, so as the fat gets burned, our estrogen levels decrease, and our hormones get more balanced (this is why women with PCOS who lose even 10% of their body weight will often regain their periods).
The above is a simplification of the system (and really, even the researchers don't know everything about the relationships between insulin, weight, and PCOS), so there are likely some flaws in the descriptions. That said, it's what I recall from the research I've done throughout the years, as well as my own experiences with hyperinsulinemia and Metformin. It's basically a giant system of complex checks and balances intended to keep the body running. In cases of PCOS, hyperinsulinemia, and Diabetes, this system is dysfunctional, and Metformin helps to restore that balance.