Diabetic nephropathy (DN) as a cause of end-stage renal disease (ESRD) is increasing worldwide. Moreover, DN is associated with a highly increased incidence of cardiovascular morbidity and mortality. Much research has been conducted in both basic science and clinical therapeutics, which has enhanced the understanding of the pathophysiology of diabetic nephropathy and expanded the potential therapies available. DN is characterized by progressive expansion of the mesangial matrix and thickening of the glomerular basement membrane, resulting in the obliteration of the glomerular capillary lumen, loss of glomerular function and proteinuria. Protein glycation reactions leading to advanced glycation end-products (AGEs) are thought to be the major causes of different diabetic complications. Type IV collagen (Col4) is a major component of extracellular matrix (ECM) and increased Col4 has been linked to the development of glomerulosclerosis in experimental and human diabetic nephropathy. Smad1 transcriptionally regulates Col4 and other glomerulosclerosis-related molecules such as Type I and III collagens and smooth muscle α actin (SMA). Although Smad1 is not expressed in normal glomeruli, bone morphogenetic protein 4 (BMP4) induces and activates Smad1. Conditional transgenic mice for BMP4 exhibits advanced diabetic glomerulosclerosis and marked albuminuria in normal blood glucose condition, suggesting that BMP4 is an essential factor in the pathophysiological mechanisms in DN. Although microalbuminuria remains the gold standard for early detection of DN, it is not a sufficiently accurate predictor of DN risk. Therefore, it has been deemed necessary to find a novel diagnostic molecular marker specific for the diabetic injuries in the progressive phase of DN, along with the elucidation of the molecular mechanisms in the diabetic glomeruli. This review describes current concepts in the epidemiology, pathophysiology, diagnosis, and treatment of this disorder, with a special emphasis on the molecular mechanisms of diabetic glomerulosclerosis and its accurate diagnosis.