The insulin signaling cascade was investigated in rat myocardium in vivo in the presence of streptozocin (STZ)-induced diabetes and after diabetes treatment by islet transplantation under the kidney capsule. The levels of insulin-stimulated tyrosine phosphorylation of the insulin receptor β-subunit, insulin receptor substrate (IRS)-2, and p52Shc were increased in diabetic compared with control heart, whereas tyrosine phosphorylation of IRS-1 was unchanged. The amount of the p85 subunit of phosphatidylinositol 3-kinase (PI 3-kinase) and the level of PI 3-kinase activity associated with IRS-2 were also elevated in diabetes, whereas no changes in IRS-1–associated PI 3-kinase were observed. Insulin-induced phosphorylation of Akt on Thr-308 was increased fivefold in diabetic heart, whereas Akt phosphorylation on Ser-473 was normal. In contrast with Akt phosphorylation, insulin-induced phosphorylation of glycogen synthase kinase (GSK)-3, a major cellular substrate of Akt, was markedly reduced in diabetes. In islet-transplanted rats, the majority of the alterations in insulin-signaling proteins found in diabetic rats were normalized, but insulin stimulation of IRS-2 tyrosine phosphorylation and association with PI 3-kinase was blunted. In conclusion, in the diabetic heart, 1) IRS-1, IRS-2, and p52Shc are differently altered, 2) the levels of Akt phosphorylation on Ser-473 and Thr-308, respectively, are not coordinately regulated, and 3) the increased activity of proximal-signaling proteins (i.e., IRS-2 and PI 3-kinase) is not propagated distally to GSK-3. Islet transplantation under the kidney capsule is a potentially effective therapy to correct several diabetes-induced abnormalities of insulin signaling in cardiac muscle but does not restore the responsiveness of all signaling reactions to insulin.