Background Diffusion-tensor-imaging (DTI) is sensitive in detecting white matter changes in type-2 diabetes mellitus (T2DM). However, DTI indices can be affected by either neurite density or spatial variation. A novel diffusion MRI technique, termed neurite orientation dispersion and density imaging (NODDI), can provide distinct indices of fiber density and dispersion. Purpose To characterize brain microstructural alterations in T2DM patients with mild cognitive impairment (MCI) using the NODDI model. Study Type Cross-sectional. Subjects Twenty T2DM patients with (DM-MCI group), 18 age- and gender-matched T2DM patients with normal cognition (DM-NC group), and 28 euglycemic healthy controls (HC). Field Strength/Sequence 3T/NODDI. Assessment Diffusion data were analyzed using tract-based-spatial-statistics (TBSS) analysis in white matter and voxel-based analysis in both white and gray matter. NODDI indices, including intracellular volume fraction (Vic) and orientation dispersion index (ODI), were estimated from multiple regions and compared among these groups. Statistical Tests Differences between groups were compared by Student's t-test, Pearson chi-square test, or analysis of variance when appropriate. Correlation analyses were performed to investigate the relationship between NODDI variables and clinical measurements. Results Whole-brain TBSS revealed that 2.29% and 2.02% of the white matter regions exhibited decreased fractional anisotropy and Vic, respectively, between the DM-NC and HC, while considerably larger white matter areas showed decreased fractional anisotropy (38.38%) and Vic (34.64%) between the DM-MCI and HC (Student's t-test, P < 0.05). However, the angular variation of neurites, characterized by ODI, exhibited very little (0.1%, P < 0.05) or no difference (P > 0.05) between either the DM-MCI or DM-NC groups and HC. Decreased Vic values in the genu of the corpus callosum (R = 0.580, 0.551 and 0.586, P < 0.01) and thalamus (R = 0.570, 0.616, and 0.595, P < 0.05) correlated with glycosylated hemoglobin A1c level, disease duration, and neuropsychological scores, respectively. Data Conclusion T2DM patients with cognitive decline had reduced Vic, which indicated decreased density of axons and dendrites. NODDI might be able to help probe microstructural changes in white and gray matter and provide information on diabetic encephalopathy, including those with cognitive impairment. Technical Efficacy: Stage 2 J. Magn. Reson. Imaging 2019;50:889-898.