Older adults with type 2 diabetes have mobility impairment and reduced fitness. This study aimed to test the efficacy of the "Tai Chi for Diabetes" form, developed to address health-related problems in diabetes, including mobility and physical function. Thirty-eight older adults with stable type 2 diabetes were randomized to Tai Chi or sham exercise, twice a week for 16 weeks. Outcomes included gait, balance, musculoskeletal and cardiovascular fitness, self-reported activity and quality of life. Static and dynamic balance index (-5.8 +/- 14.2; p = 0.03) and maximal gait speed (6.2 +/- 11.6%; p = 0.005) improved over time, with no significant group effects. There were no changes in other measures. Non-specific effects of exercise testing and/or study participation such as outcome expectation, socialization, the Hawthorne effect, or unmeasured changes in health status or compliance with medical treatment may underlie the modest improvements in gait and balance observed in this sham-exercise-controlled trial. This Tai Chi form, although developed specifically for diabetes, may not have been of sufficient intensity, frequency, or duration to effect positive changes in many aspects of physiology or health status relevant to older people with diabetes.