The natural course of early diabetic retinopathy in young subjects with insulin-dependent diabetes mellitus was evaluated during 693 patient visits for 259 subjects during a mean of 2.4 years. Diabetic retinopathy is considered a progressive disease among people with insulin-dependent diabetes mellitus (type I). Improvement of early retinopathy has not been recognized as a part of the natural course. In our experience, 25% of observations in subjects with early diabetic retinopathy (grades 2 and 3) showed improvement. Thus, 28 of 174 observations of diabetic retinopathy improved from grade 2 to grade 1, and 34 of 79 observations improved from grade 3 to grades 2 or 1. Markov chains indicate that 25% of observations of diabetic retinopathy will change from grade 1 to grade 5 or 6 in 17.0 years and 25% will change from grade 2 to grade 5 or 6 in 16.0 years. Future studies of diabetic retinopathy should consider a matrix of estimated transition probabilities, depending on the population, to judge probabilities of transition between states of retinopathy.