1. Type II alveolar epithelial cells isolated from adult rats and grown in primary culture were studied using the whole-cell configuration of the gigohm-seal voltage clamp technique. 2. The average specific capacitance of type II cells was 2.5 microF/cm2, suggesting that type II cell membranes in vitro are irregular, with an actual area more than twice the apparent area. 3. Most type II cells have time- and voltage-dependent outward currents carried by potassium ions. Potassium currents activate with a sigmoid time course upon membrane depolarization, and inactivate during maintained depolarization. The average maximum whole-cell K+ conductance was 1.6 nS. 4. Two distinct types of K+-selective channels underlie outward currents in type II cells. Most cells have currents resembling delayed rectifier K+ currents in skeletal muscle, nerve and immune cells. A few cells had a different type of K+ conductance which is more sensitive to block by tetraethylammonium ions, has faster 'tail currents', and activates at more positive potentials. 5. In some experiments, individual type II cells were identified by staining with phosphine, a fluorescent dye which is concentrated in lamellar bodies. Both types of K+ channels were seen in type II cells identified with this dye. 6. Phosphine added to the bathing solution reversibly reduced K+ currents and shifted K+ channel activation to more positive potentials. Excitation of phosphine to fluoresce reduced irreversibly K+ currents in type II cells. The usefulness of phosphine as a means of identifying cells for study is discussed.