Glucagon (10 nM) caused a transient elevation of intracellular cyclic AMP concentrations, which reached a peak in around 5 min, and slowly returned to basal values in around 30 min. When 1 mM-3-isobutyl-1-methylxanthine (IBMX) was present, this process yielded a Ka of 1 nM for glucagon. The addition of insulin (10 nM) after 5 min exposure to glucagon (10 nM) caused intracellular cyclic AMP concentrations to fall dramatically, attaining basal values within 10 min. The regulation of this process was dose-dependent, exhibiting a Ka of 0.4 nM for insulin. If insulin and glucagon were added together to hepatocytes, then insulin decreased the magnitude of the cyclic AMP response to glucagon. IBMX (1 mM) prevented insulin antagonizing the action of glucagon in both of these instances. A gentle homogenization procedure followed by a rapid subcellular fractionation of hepatocytes on a Percoll gradient was developed. This was used to resolve subcellular membrane fractions and to identify cyclic AMP phosphodiesterase activity in both membrane and cytosol fractions. Glucagon and insulin only affected the activity of two distinct membrane-bound species, a plasma-membrane enzyme and a 'dense vesicle' enzyme. Glucagon (10 nM), insulin (10 nM), IBMX (1 mM), dibutyryl cyclic AMP (10 microM) and cholera toxin (1 microgram/ml) all elicited the activation of the 'dense vesicle' enzyme. The plasma-membrane enzyme was not activated by glucagon, IBMX or dibutyryl cyclic AMP, although insulin and cholera toxin both led to its activation. The degree of activation of the plasma-membrane enzyme produced by insulin was increased in the presence of IBMX or dibutyryl cyclic AMP. Glucagon pretreatment (5 min) of hepatocytes blocked the ability of insulin to activate the plasma-membrane enzyme. The activity state of these phosphodiesterases is discussed in relation to the observed changes in intracellular cyclic AMP concentrations. It is suggested that insulin exerts its action on the plasma-membrane phosphodiesterase through a mechanism involving a guanine nucleotide-regulatory protein.