The mechanism by which the liver degrades insulin has not yet been completely clarified. In intact, non-"leaky" cells the primary process seems to be mediated by initial receptor binding. We now demonstrate that isolated rat hepatocytes in primary culture are suitable for examining insulin degradation. Hepatocytes did not leak degrading activity into the medium, and thus, the degradation seen was essentially exclusively cell mediated. [125I]Iodoinsulin degradation by these cells was dependent on time and cell concentration. There was a short lag time before degradation products could be detected in the medium. After incubation with the hepatocytes, three peaks of 125I-labeled material could be separated by chromatography on Sephadex G-50. The same three peaks were seen with 125I-labeled material extracted from the cells. When [3H]insulin, labeled exclusively at the B-1 phenylalanine residue, was incubated with the cells, additional peaks of labeled material were recovered from the column. These additional peaks were intermediate in size between insulin and iodotyrosine, suggesting the production of products smaller than insulin but larger than individual amino acids. In order to begin to characterize the subcellular mechanisms for insulin metabolism, the effect of various potential inhibitors on insulin degradation were examined. The most effective inhibitors were N-ethylmaleimide, bacitracin, and Kunitz pancreatic trypsin inhibitor. Chloroquine decreased degradation only 10%, and NH4Cl had no detectable effect. The effect of the inhibitors on the purified insulin-degrading enzyme, insulin protease, was also examined. The purified enzyme responded essentially identically as the intact cells to the various inhibitors. From all these data it would seem that lysosomal degradation of insulin in the hepatocyte may be a relatively minor pathway and the neutral protease may play a major role.