Background: Verbal memory impairment is well documented in type 2 diabetes mellitus (T2DM) but, to date, the neural substrates remain unclear. The present study evaluated verbal memory and ascertained the degree of frontal and temporal lobe involvement in the anticipated verbal memory impairment among adults with T2DM. Method: Forty-six late-middle-aged and elderly adults with T2DM and 50 age-, sex-, and education-matched adults without T2DM underwent medical evaluation, verbal memory assessment, and brain magnetic resonance imaging (MRI) evaluations. Results: As anticipated, participants with T2DM had clear verbal memory impairments. Consistent with prior reports, we found volume reductions restricted to the hippocampus. Our diffusion tensor imaging analysis revealed that participants with T2DM had extensive cerebral gray and white matter microstructural abnormalities predominantly in the left hemisphere, with a larger concentration present in the temporal lobe. In contrast, we uncovered mostly nonspecific microstructural abnormalities in the absence of tissue loss in the frontal lobe. Of great importance, we present the first evidence among participants with T2DM linking verbal memory impairment and compromised microstructural integrity of the left parahippocampal gyrus, a key memory-relevant structure. Conclusions: Our results suggest that the hippocampus and parahippocampal gyrus may be particularly vulnerable to the deleterious effects of T2DM. The parahippocampal gyrus in particular may play a crucial role in the verbal memory impairments frequently reported in T2DM. Future studies should employ methods such as resting state functional magnetic resonance imaging and diffusion tensor imaging tractography to better characterize network connectivity, which may help further characterize the verbal memory impairment frequently reported in T2DM.