Diabetic nephropathy is the most common cause of end-stage renal disease (ESRD). The natural history of diabetic nephropathy has changed over the last decades, as a consequence of better metabolic and blood pressure management. Thus, it may now be possible to delay or halt the progression towards ESRD in patients with overt diabetic nephropathy, and the decline of renal function is not always inexorable and unavoidable. Also, the rate of progression from microalbuminuria to overt nephropathy is much lower than originally estimated in the early 80s. Furthermore, there is now evidence that it is possible, in humans, to obtain reversal of the established lesions of diabetic nephropathy. This review focuses on the contribution of kidney biopsy studies to the understanding of the pathogenesis and natural history of diabetic nephropathy and the identification of patients at high risk of progression to ESRD. The classic lesions of diabetic nephropathy and the well-established structural–functional relationships in type 1 diabetes will be briefly summarised and the renal lesions leading to renal dysfunction in type 2 diabetes will be described. The relevance of these biopsy studies to diabetic nephropathy pathogenesis will be outlined. Finally, the evidence and the possible significance of reversibility of diabetic renal lesions will be discussed, as well as future directions for research in this field.