OBJECTIVE: To estimate direct medical costs of managing the complications of type 2 diabetes. RESEARCH DESIGN AND METHODS: Costs were estimated for 15 diabetic complications by applying unit costs to typical resource-use profiles. Resource use and unit costs were estimated from many sources, including acute care discharge databases, clinical guidelines, government reports, fee schedules, and peer-reviewed literature. For each complication, the event costs are those associated with resource use that is specific to the acute episode and any subsequent care occurring in the 1st year. State costs are the annual costs of continued management. All costs are expressed in 1996 U.S. dollars. RESULTS: As expected, the more severe or debilitating events, such as acute myocardial infarction ($27,630 event cost; $2,185 state cost), generate a greater financial burden than do early-stage complications, such as microalbuminuria ($62 event cost; $14 state cost). Yet, complications that are initially relatively low in cost (e.g., microalbuminuria) can progress to more costly advanced stages (e.g., end-stage renal disease, $53,659 state cost); therefore, minor complications should also be considered in any economic analysis of diabetes. CONCLUSIONS: The recent literature has lacked cost estimates that may be readily translated into patient-level cost inputs for an economic model. Emerging therapies that may reduce the incidence of some diabetic complications will need to be scrutinized economically in today's cost-conscious environment. The cost estimates from this study provide one piece of the economic analysis needed to evaluate these new interventional therapies.