OBJECTIVE: To study how type 2 diabetes adversely affects brain volumes, changes in volume, and cognitive function. RESEARCH DESIGN AND METHODS: Regional brain volumes and ischemic lesion volumes in 1,366 women, aged 72-89 years, were measured with structural brain magnetic resonance imaging (MRI). Repeat scans were collected an average of 4.7 years later in 698 women. Cross-sectional differences and changes with time between women with and without diabetes were compared. Relationships that cognitive function test scores had with these measures and diabetes were examined. RESULTS: The 145 women with diabetes (10.6%) at the first MRI had smaller total brain volumes (0.6% less; P = 0.05) and smaller gray matter volumes (1.5% less; P = 0.01) but not white matter volumes, both overall and within major lobes. They also had larger ischemic lesion volumes (21.8% greater; P = 0.02), both overall and in gray matter (27.5% greater; P = 0.06), in white matter (18.8% greater; P = 0.02), and across major lobes. Overall, women with diabetes had slightly (nonsignificant) greater loss of total brain volumes (3.02 cc; P = 0.11) and significant increases in total ischemic lesion volumes (9.7% more; P = 0.05) with time relative to those without diabetes. Diabetes was associated with lower scores in global cognitive function and its subdomains. These relative deficits were only partially accounted for by brain volumes and risk factors for cognitive deficits. CONCLUSIONS: Diabetes is associated with smaller brain volumes in gray but not white matter and increasing ischemic lesion volumes throughout the brain. These markers are associated with but do not fully account for diabetes-related deficits in cognitive function.