Glycerol utilization for phospholipid biosynthesis was examined in type II pneumocytes isolated from normal and streptozocinin-diabetic rats. With glucose in the incubation medium, incorporation of exogenous [1,3-14C]glycerol into disaturated phosphatidylcholine, total phosphatidylcholine (PC), phosphatidylglycerol (PG) and phosphatidylethanolamine (PE) was increased 4-fold in cells from diabetic rats. In the absence of glucose, glycerol incorporation was 5-fold greater than in its presence in cells from normal animals, but was further increased 2.2-fold in cells from diabetic rats. Insulin treatment of diabetic rats returned all incorporation rates to control values. The increased glycerol incorporation rates were not due to differences in either phospholipid turnover or the size of the glycerol 3-phosphate precursor pool. Kinetic analysis of glycerol entry into the acid-soluble cell fraction indicated that glycerol transport occurred largely by simple diffusion, and was not rate limiting for its entry into lipids. Glycerol entry into the total lipid fraction was saturable, reaching a Vmax of 48 pmol/micrograms DNA per h in normal cells and 120 pmol/micrograms DNA per h in cells from diabetic rats, with no change in the Km (0.31 mM). While glycerol oxidation was reduced 23% in cells from diabetic rats in the presence of glucose and by 44% in the absence of glucose, glycerol kinase activity in sonicates of cells from diabetic animals was increased 210% and was reversed by in vivo insulin treatment. These results suggest that glycerol utilization in type II pneumocytes is a hormonally regulated function of both glycerol oxidation and glycerol phosphorylation.