Aims To study whether microalbuminuria, endothelial dysfunction and low-grade inflammation are associated with the presence and progression of diabetic retinopathy. Methods Patients with Type 2 diabetes (n = 328) attending a diabetes clinic were followed for 10 years and examined annually during the last 7 years. Retinopathy was assessed after pupillary dilatation by direct ophthalmoscopy (baseline) and two-field 60 degrees fundus photography (follow-up). Urinary albumin excretion, and markers of endothelial function (von Willebrand factor, tissue-type plasminogen activator, soluble E-selectin (sE-selectin), and soluble vascular cell adhesion molecule 1) and inflammatory activity (C-reactive protein and fibrinogen) were determined. Results The prevalence of retinopathy was 33.8%. The median diabetes duration at baseline was 7 years (interquartile range 2-12 years). The highest tertiles of baseline urinary albumin excretion and glycated haemoglobin (HbA(1c)) were associated with prevalent retinopathy: odds ratio (OR) 95% confidence interval (CI) 2.80 (1.44-5.46) and 2.19 (1.11-4.32), respectively. Progression of retinopathy occurred in 188 patients. The second and third tertiles of baseline sE-selectin were associated with progression of retinopathy [1.44 (1.04-2.01) and 1.61 (1.19-2.18)] but not independently of HbA(1c). None of the other markers was significantly associated with the presence or progression of retinopathy. High baseline HbA(1c) was significantly associated with progression of retinopathy: 1.65 (1.21-2.25). Conclusion In this population of patients with Type 2 diabetes who attended a diabetes clinic, there was some evidence for a role of endothelial dysfunction in the progression of retinopathy. We could not demonstrate a role for low-grade inflammation. Our study emphasizes the importance of glycaemic control in the development and progression of retinopathy.