One of the earliest clinically detectable abnormalities in diabetic nephropathy is microalbuminuria that eventually progresses to proteinuria. The degree of proteinuria correlates with the progression of glomerulosclerosis and tubulointerstitial fibrosis. In the glomerulus, a typical podocytopathy develops that participates in the initiation of glomerulosclerosis and the accelerated plasma protein leakage across the glomerular basement membrane (GBM) into Bowman's space. Downstream into the tubular compartment, the proteinuria induces proinflammatory and profibrogenetic injury in tubular cells which can facilitate the development of interstitial fibrosis and tubular atrophy. It has long been held that hemodynamic changes and the loss of negatively charged proteoglycans in the GBM are important mediators of proteinuria. More recently, biopsy studies in humans with diabetic kidney disease have provided strong evidence that podocytes are injured very early in the course of nephropathy. This podocytopathy--which is characterized by decreased podocyte number and/or density, GBM thickening and altered matrix composition, and foot process effacement--correlates closely with the development and progression of albuminuria. Components of the diabetic milieu (high glucose, accumulation of glycated proteins, high intrarenal angiotensin II (ANG II), and hypertension-induced mechanical stress) result in activation of cytokine systems, the most important of which are transforming growth factor-beta1 (TGF-beta1) and vascular endothelial growth factor-A (VEGF-A). ANG II-stimulated podocyte-derived VEGF, through a novel autocrine signaling loop, appears to be a major cause of nephrin downregulation and the development of proteinuria. Nephrin is an important protein of the slit diaphragm with anti-apoptotic signaling properties. TGF-beta1 causes podocyte apoptosis and an increase in extracellular matrix deposition. As a consequence, the denuded GBM adheres to Bowman's capsule initiating the development of glomerulosclerosis. Good control of hyperglycemia and hypertension and maximal inhibition of ANG II are essential steps in preventing the development and progression of diabetic nephropathy.