To evaluate the development of diabetic neuropathy, the current study examined changes in peripheral axonal function. Nerve excitability techniques were undertaken in 108 type 2 diabetic patients with nerve conduction studies (NCS), HbA_1c levels, and total neuropathy score (TNS). Patients were categorized into two cohorts: patients with diabetes without neuropathy (DWN group [n = 56]) and patients with diabetes with neuropathy (DN group [n = 52]) and further into severity grade 0 (TNS 0–1 [n = 35]), grade 1 (TNS 2–8 [n = 42]), and grade 2/3 (TNS 9–24 [n = 31]). Results revealed that the DWN group had a significantly increased threshold, prolonged latency, and changes in excitability parameters compared with age-matched control subjects. Patients with neuropathy demonstrated significant alteration in recovery cycle parameters and depolarizing threshold electrotonus. Within the DWN cohort, there were significant correlations between HbA_1c level and latency and subexcitability, whereas the estimated glomerular filtration rate correlated with superexcitability in patients with neuropathy. Furthermore, excitability parameters became progressively more abnormal with increasing clinical severity. These results suggest a spectrum of excitability abnormalities in patients with diabetes and that early axonal dysfunction may be detected prior to the development of neuropathy. As progressive changes in excitability parameters correlated to neuropathy severity, excitability testing may provide a biomarker of the early development and severity of diabetic neuropathy, providing insights into the pathophysiological mechanisms producing axonal dysfunction.