To study the effect of diabetes on pulmonary surfactant secretion, type II pneumocytes from adult streptozotocin-induced diabetic rats were placed in short-term culture. As opposed to a linear secretory rate by control type II cells, the secretory rate of type II cells from diabetic animals was biphasic reaching a minimum at 1.5 h. When exogenous surfactant containing radioactive phosphatidylcholine was added to the incubation media for 1.5 h, the cells from diabetic animals incorporated more exogenous phosphatidylcholine into lamellar bodies than control cells. This suggests that in the type II cell from diabetic animals, the rate of reutilization is greater than the rate of secretion until 1.5 h, at which time the rate of secretion becomes greater. The altered secretory pattern was reversed by in vivo insulin treatment 30 min prior to killing but not by the addition of insulin to the incubation media. When challenged by isoproterenol, a beta-adrenergic agonist, the secretory pattern of cells from diabetic animals was biphasic as observed with basal secretion; however, secretion was stimulated 30% as opposed to 100% increase in control cells. These data suggest that basal and stimulated secretion are altered in the cultured type II cell from diabetic animals and restored by in vivo but not in vitro insulin treatment.