Diabetic nephropathy characterized by proteinuria and sclerosis is the leading cause of renal failure, but its mechanisms are not well understood. Zucker Obese (ZO) rat model of obesity, insulin resistance, and hypertension has been used to study nephropathy. We hypothesize that chronically elevated intrarenal angiotensin II (ANG II) down-regulates nephrin, a key slit-pore protein and up-regulates fibrogenic molecule transforming growth factor (TGFβ1) and thus result in progression of nephropathy in type 2 diabetes. Untreated or angiotensin converting enzyme (ACE) inhibitor, captopril, treated ZO and control Lean (ZL) rats were used to measure intrarenal levels of ANG II, glomerular nephrin, TGFβ1, collagen and fibronectin with age using radioimmunoassay, RT-PCR and immunoblot techniques. Progression of nephropathy was established by measuring proteinuria and sclerosis. ZO rats developed obesity, hyperglycemia, hyperinsulinimia, increase in intrarenal ANG II and proteinuria. Expression of glomerular nephrin decreased while expression of TGFβ1 and matrix components increased in ZO rats. Captopril treatment prevented increase in intrarenal ANG II, and reversed expression of nephrin, TGFβ1, collagen and fibronectin. We conclude that in this model of type 2 diabetic nephropathy, chronically elevated intrarenal ANG II causes proteinuria via decrease in nephrin and glomerulosclerosis via TGFβ1 mediated increase in matrix component.