Diabetic nephropathy (DN) is a common microvascular complication of diabetes and can result in end-stage renal disease (ESRD) necessitating long-term dialysis or kidney transplantation. The costs of these complications are relatively high. The aim of this study was to quantify and compare the rates and annual costs of DN in the USA and the UK. A cost of illness model was used to estimate the numbers of people with DN (microalbuminuria, overt nephropathy, and ESRD) or a previous kidney transplant at a given point in time and the numbers of new kidney transplants during a year. All costs were estimated in 2001 currencies. A sensitivity analysis assessed the robustness of the national annual cost estimates. In the USA, the total annual medical costs incurred by all payers in managing DN were US dollars 1.9 billion for Type 1 diabetes (range: US dollars 1.0-2.8 billion), US dollars 15.0 billion for Type 2 diabetes (range: US dollars 7.6-22.4 billion), and US dollars 16.8 billion for all diabetes (range: US dollars 8.5-25.2 billion). In the UK, the total annual costs to the National Health Service (NHS) of managing DN were US dollars 231 million ( pound 152 million) for Type 1 diabetes (range: US dollars 190-350 million [ pound 125-230 million]), US dollars 933 million (pound 614 million) for Type 2 diabetes (range: US dollars 809 million-US dollars 1.4 billion [pound 532-927 million]), and US dollars 1.2 billion ( pound 765 million) for all diabetes (range: US dollars 999 million-US dollars 1.8 billion [pound 657 million- pound 1.2 billion]). The total annual cost of DN is 13 times greater in the USA than in the UK. Controlling for the substantially higher number of people at risk, the total cost per person with DN and/or a kidney transplant is 40% higher: US dollars 3735 in the USA and US dollars 2672 (pound 1758) in the UK.