The renin-angiotensin aldosterone system (RAAS) is well-established to be involved in diabetic nephropathy. Several abnormalities in the RAAS have been described in diabetes mellitus, including an abnormal aldosterone to renin ratio, elevated angiotensin I-converting enzyme (ACE) levels, and altered angiotensin II sensitivity. Whereas the renoprotective properties of ACE-inhibition in diabetic nephropathy have been demonstrated more than a decade ago, somewhat surprisingly, the role of ACE-activity in the pathogenesis of diabetic nephropathy is not well established. This paper addresses the possible functional impact of genetic and environmental increased in ACE activity in the pathogenesis of diabetic renal damage, in the context of the various other abnormalities in the RAAS in diabetes. Human and experimental data on circulating and tissue ACE in diabetes are reviewed, as well as the associations of ACE with angiotensin I conversion, with pathophysiological responses, and with renal end organ damage. New data from our laboratory provide evidence for interaction between genetical regulation of ACE activity by the ACE (I/D) genotype and diabetes as an environmental factor. Moreover, for functional effects of the elevated ACE activity in terms of increased conversion of angiotensin I to angiotensin II. The effects of enhanced generation of angiotensin II are modulated by the angiotensin II-subtype I receptor (AT1R). Altered AT1R sensitivity has been reported in diabetes that may further modulate the eventual effects of elevated ACE. Epidemiological data on the association of genetically elevated ACE activity with diabetic nephropathy provide support for a pathogenetic role of elevated ACE activity in diabetic nephropathy. Together, the data suggest that differences in ACE expression and activity, resulting from both genetic and environmental factors and their interaction can modulate the pathogenesis of diabetic nephropathy. Unravelling the nature of this interaction, with focus on modifiable environmental factors, may help to ameliorate the risk for nephropathy in diabetes.