Background: Astragali Radix and Lycopi Herba were widely used in clinical practice for treating the diabetic nephropathy (DN), but their therapeutic mechanisms were not clear. Objective: To observe the effects of the water-extraction of Astragali Radix and Lycopi Herba on the signaling pathway of TGF-Smads-UPP in streptozotocin (STZ)-induced DN. Materials and Methods: Sprague-Dawley (SD) rats were randomly divided into the normal control (NC) group and the model group. The NC group was fed with a standard diet and the other five diabetic groups received a high-fat diet. After 4 weeks, five diabetic groups were treated with STZ (30mg/kg i.p.). The NC group rats were treated with citrate buffer. Tail random blood glucose (RBG) was measured 72h later using a strip-operated blood glucose sensor and monitored every 2 weeks until drug intervention. Rats with RBG levels less than 16.7mmol/L were excluded from the diabetic groups. At the end of 4 weeks after STZ injection, 24h microalbuminuria was collected and detected. The microalbuminuria was measured by radioimmunoassay (RIA). The blood glucose was tested using a blood glucose meter. The kidney was dissected from each SD rat. Proteins and mRNA of TGF-β1, Smads and Smurf were tested by western-blot and real-time PCR analysis, and 26S proteasome activity was measured by an ELISA kit. Results: The water-extraction of Astragali Radix and Lycopi Herba significantly lowered fasting glucose and urine albumin in diabetic rats through inhibition of TGF-β1 mRNA and protein expression in the STZ-induced diabetic rats, and regulation of the Smad3, Smad7, Smurf1, Smurf2 mRNA and protein expression, as well as elevated 26S proteasome activity to play control effect in DN. Conclusion: 0.9 g/ml water-extraction of Astragali Radix and Lycopi Herba group has significant therapeutic effects on the STZ-induced diabetic rats, and this regulation depends on TGF-Smads-UPP signaling pathway.