OBJECTIVE Type 2 diabetes (T2DM) is associated with brain atrophy and cerebrovascular disease. We aimed to define the regional distribution of brain atrophy in T2DM and to examine whether atrophy or cerebrovascular lesions are feasible links between T2DM and cognitive function. RESEARCH DESIGN AND METHODS This cross-sectional study used magnetic resonance imaging (MRI) scans and cognitive tests in 350 participants with T2DM and 363 participants without T2DM. With voxel-based morphometry, we studied the regional distribution of atrophy in T2DM. We measured cerebrovascular lesions (infarcts, microbleeds, and white matter hyperintensity [WMH] volume) and atrophy (gray matter, white matter, and hippocampal volumes) while blinded to T2DM status. With use of multivariable regression, we examined for mediation or effect modification of the association between T2DM and cognitive measures by MRI measures. RESULTS T2DM was associated with more cerebral infarcts and lower total gray, white, and hippocampal volumes (all P < 0.05) but not with microbleeds or WMH. T2DM-related gray matter loss was distributed mainly in medial temporal, anterior cingulate, and medial frontal lobes, and white matter loss was distributed in frontal and temporal regions. T2DM was associated with poorer visuospatial construction, planning, visual memory, and speed (P ≤ 0.05) independent of age, sex, education, and vascular risk factors. The strength of these associations was attenuated by almost one-half when adjusted for hippocampal and total gray volumes but was unchanged by adjustment for cerebrovascular lesions or white matter volume. CONCLUSIONS Cortical atrophy in T2DM resembles patterns seen in preclinical Alzheimer disease. Neurodegeneration rather than cerebrovascular lesions may play a key role in T2DM-related cognitive impairment.