Diabetic retinopathy (DR) is the leading cause of blindness in working-age adults. Early stage DR involves inflammation, vascular leakage, apoptosis of vascular cells and neurodegeneration. In this study, we hypothesized that cells derived from the stromal fraction of adipose tissue (ASC) could therapeutically rescue early stage DR features. Streptozotocin (STZ) induced diabetic athymic nude rats received single intravitreal injection of human ASC into one eye and saline into the other eye. Two months post onset of diabetes, administration of ASC significantly improved "b" wave amplitude (as measured by electroretinogram) within 1-3 weeks of injection compared to saline treated diabetic eyes. Subsequently, retinal histopathological evaluation revealed a significant decrease in vascular leakage and apoptotic cells around the retinal vessels in the diabetic eyes that received ASC compared to the eyes that received saline injection. In addition, molecular analyses have shown down-regulation in inflammatory gene expression in diabetic retina that received ASC compared to eyes that received saline. Interestingly, ASC were found to be localized near retinal vessels at higher densities than seen in age matched non-diabetic retina that received ASC. In vitro, ASC displayed sustained proliferation and decreased apoptosis under hyperglycemic stress. In addition, ASC in co-culture with retinal endothelial cells enhance endothelial survival and collaborate to form vascular networks. Taken together, our findings suggest that ASC are able to rescue the neural retina from hyperglycemia-induced degeneration, resulting in importantly improved visual function. Our pre-clinical studies support the translational development of adipose stem cell-based therapy for DR to address both retinal capillary and neurodegeneration.