Retinal microvascular dysfunction in diabetes is a major component of diabetic retinopathy. This review highlights recent observations regarding the cellular anatomy that contributes to the blood-retinal barrier and its breakdown, the alterations of macroglial, neuronal, and microglial cells in diabetes, and how these changes lead to loss of vision. In addition, the effects of systemic pathophysiologic influences, including metabolic control, blood pressure, and fluid volume on the formation of diabetic macular edema are discussed. Finally, an overview of inflammatory mechanisms and responses in the retina in diabetes is provided. Together, these new observations provide a broader clinical and research perspective on diabetic retinal vascular dysfunction than previously considered, and provide new avenues for improved treatments to prevent loss of vision.