Due to substantial morbidity and high complications, diabetes mellitus is considered as the third "killer" in the world. A search for alternative antidiabetic drugs from herbs or fungi is highly demanded. Our present study aims to investigate the antidiabetic activities of Cordyceps militaris on diet-streptozotocin-induced type 2 diabetes mellitus in rats. Diabetic rats were orally administered with water extract or alcohol extract at 0.05 g/kg and 2 g/kg for 3 weeks, and then, the factors levels related to blood glucose, lipid, free radicals, and even nephropathy were determined. Pathological alterations on liver and kidney were examined. Data showed that, similar to metformin, Cordyceps militaris extracts displayed a significant reduction in blood glucose levels by promoting glucose metabolism and strongly suppressed total cholesterol and triglycerides concentration in serum. Cordyceps militaris extracts exhibit antioxidative effects indicated by normalized superoxide dismutase and glutathione peroxidase levels. The inhibitory effects on blood urea nitrogen, creatinine, uric acid, and protein revealed the protection of Cordyceps militaris extracts against diabetic nephropathy, which was confirmed by pathological morphology reversion. Collectively, Cordyceps militaris extract, a safe pharmaceutical agent, presents excellent antidiabetic and antinephropathic activities and thus has great potential as a new source for diabetes treatment.