Between 20% and 40% of patients with diabetes ultimately develop diabetic nephropathy, which in the US is the most common cause of end-stage renal disease requiring dialysis. Diabetic nephropathy has several distinct phases of development and multiple mechanisms contribute to the development of the disease and its outcomes. This Review provides a summary of the latest published data dealing with these mechanisms; it focuses not only on candidate genes associated with susceptibility to diabetic nephropathy but also on alterations in various cytokines and their interaction with products of advanced glycation and oxidant stress. Additionally, the interactions between fibrotic and hemodynamic cytokines, such as transforming growth factor beta1 and angiotensin II, respectively, are discussed in the context of new information concerning nephropathy development. We touch on the expanding clinical data regarding markers of nephropathy, such as microalbuminuria, and put them into context; microalbuminuria reflects cardiovascular and not renal risk. If albuminuria levels continue to increase over time then nephropathy is present. Lastly, we look at advances being made to enable identification of genetically predisposed individuals.