Diabetes is a highly prevalent chronic and debilitating condition that is associated with significant morbidity, mortality, and increased health care costs. Depression is also highly prevalent and is a leading cause of disability, work place absenteeism, lost productivity, and increased use of health care resources. There is evidence that persons with diabetes are twice as likely to have depression as persons without diabetes and that approximately 30% of persons with diabetes have clinically relevant depression. Comorbid depression is strongly associated with adverse health outcomes in persons with diabetes including poor glycemic control, increased risk of complications, decreased adherence to medications, decreased adherence to dietary recommendations, and increased health care costs. This article reviews the epidemiology of depression, the effect of depression on diabetes self-management behavior and diabetes-specific outcomes, potential pathways (mediators and moderators) for these effects, and effective treatment strategies for depression in individuals with type 2 diabetes.