We investigated the cellular mechanism(s) of insulin resistance associated with non-insulin-dependent diabetes mellitus (NIDDM) using adipocytes isolated from non-obese, insulin-resistant type II diabetic Goto-Kakizaki (GK) rats, a well-known genetic rat model for type II diabetic humans. In adipocytes isolated from control rats, insulin (5 nmol/L) stimulated particulate serine/threonine protein phosphatase-1 (PP-1) activity (56% increase over the basal value after 5 minutes). In contrast, adipocytes from diabetic GK rats exhibited a 32% decrease in basal (P < .05) and a 65% decrease in insulin-stimulated PP-1 activity compared with values in control Wistar rats. Conversely, cytosolic PP-2A activity was elevated in diabetic GK rats in the basal state (twofold increase v controls, P < .05). Insulin treatment resulted in a 50% to 60% inhibition in PP-2A activity in control rats, but failed to inhibit PP-2A activity in diabetic GK rat adipocytes. The defects in PP-1/PP-2A activation/inactivation were accompanied by inhibition of insulin's effect on mitogen-activated protein kinase (MAPK) activation. In addition, insulin-stimulated tyrosine phosphorylation of insulin receptor (IR) substrate-1 (IRS-1) was decreased more than 90% compared with control values, while a twofold increase in basal IRS-1 phosphorylation status was observed in diabetic GK rats. The abnormalities in IRS-1 phosphorylation were accompanied by a severe impairment of insulin-mediated targeting of the Grb2/Sos complex to the plasma membrane. We conclude that (1) a rapid activation of PP-1 along with concomitant inhibition of cytosolic PP-2A may be important in the mechanism of insulin action in a normal cell, and (2) the resistance to insulin in terms of glucose uptake and glycogen synthesis observed in diabetic GK rats is partly due to defective regulation of PP-1, PP-2A, and MAPK caused by multiple defects in the upstream insulin signaling components (IRS-1/phosphatidylinositol-3-kinase [PI3-kinase] and Grb2/Sos) that participate in insulin-mediated activation of PP-1 and inactivation of PP-2A.