The aim of this study was to characterize the provesicle formulation of nateglinide (NTG) to facilitate the development of a novel controlled release system of NTG with improved efficacy and oral bioavailability compared to the currently marketed NTG formulation (Glinate™ 60). NTG provesicles were prepared by a slurry method using the non-ionic surfactant, Span 60 (SP), and cholesterol (CH) as vesicle forming agents and maltodextrin as a coated carrier. Multilamellar niosomes with narrow size distribution were shown to be successfully prepared by means of dynamic laser scattering (DLS) and field emission scanning electron microscopy (FESEM). The absence of drug-excipient interactions was confirmed by Fourier transform infrared spectroscopy (FT-IR), differential scanning calorimetry (DSC) and X-ray diffraction (XRD) studies. In vitro release of NTG in different dissolution media was improved compared to pure drug. A goat intestinal permeation study revealed that the provesicular formulation (F4) with an SP:CH ratio of 5:5 gave higher cumulative amount of drug permeated at 48 h compared to Glinate™ 60 and control. A pharmacodynamic study in streptozotocin-induced diabetic rats confirmed that formulation F4 significantly (P<0.05) reduced blood glucose levels in comparison to Glinate 60. Overall the results show that controlled release NTG provesicles offer a useful and promising oral delivery system for the treatment of type II diabetes.