Tubulointerstitial disease, a prominent phenomenon in diabetic nephropathy, correlates with decline in renal function. The underlying pathogenic link between chronic hyperglycemia and the development of tubulointerstitial injury has not been fully elucidated, but myofibroblast formation represents a key step in the development of tubulointerstitial fibrosis. RAGE, the receptor for advanced glycation end products (AGEs), induces the expression of TGF-β and other cytokines that are proposed to mediate the transdifferentiation of epithelial cells to form myofibroblasts. Here we report specific binding of ¹²⁵I-AGE-BSA to cell membranes prepared from a rat proximal tubule cell line and show that the binding site was RAGE. AGE exposure induced dose-dependent epithelial-myofibroblast transdifferentiation determined by morphological changes, de novo alpha smooth-muscle actin expression, and loss of epithelial E-cadherin staining. These effects could be blocked with neutralizing Ab’s to RAGE or to TGF-β. Transdifferentiation was also apparent in the proximal tubules of diabetic rats and in a renal biopsy from a patient with type 1 diabetes. The AGE cross-link breaker, phenyl-4,5-dimethylthiazolium bromide (ALT 711) reduced transdifferentiation in diabetic rats in association with reduced tubular AGE and TGF-β expression. This study provides a novel mechanism to explain the development of tubulointerstitial disease in diabetic nephropathy and provides a new treatment target.