Elevated urinary albumin excretion in patients with type 1 diabetes reverts to normoalbuminuria in a majority of patients but advances toward proteinuria in some. In order to gain valuable insights into the early pathophysiology of diabetic nephropathy we evaluated the association of kidney tubular injury biomarkers with changes in albuminuria in patients with type 1 diabetes mellitus. Urine levels of kidney injury molecule-1 (KIM-1), N-acetyl-β-D-glucosaminidase (NAG), and some inflammatory markers were determined in 38 healthy individuals and 659 patients with type 1 diabetes mellitus having varying degrees of albuminuria. Urinary interleukin-6, CXCL10/IP-10, NAG, and KIM-1 levels were very low in healthy individuals, increased in type 1 patients with normoalbuminuria, and were highest in diabetic patients that had microalbuminuria. Low baseline concentrations of urinary KIM-1 and NAG both individually and collectively were significantly associated with the regression of microalbuminuria over the subsequent 2 years; an effect independent of clinical characteristics. Progression and regression of microalbuminuria were unrelated to urinary levels of interleukins 6 and 8, CXCL10/IP-10, and monocyte chemoattractant protein-1. Thus our results show that lower urinary KIM-1 and NAG levels were associated with the regression of microalbuminuria in type 1 diabetes mellitus. Hence, tubular dysfunction is a critical component of the early course of diabetic nephropathy.