The present work was undertaken to study the effect of liposome formulation factors on its efficiency as a carrier for oral administration of insulin. The insulin-liposomes were prepared by two methods: solvent evaporation hydration and solvent spherule evaporation, with various variables such as concentration of insulin (1), lecithin (L), cholesterol (C), and Tween-80 (T). It was found that the insulin-liposomes when administered orally could produce hypoglycaemia. Variation in liposome composition was found to affect the efficiency of liposome as a carrier for oral administration of insulin. A liposome system containing L, 100 mg; C, 20 mg; 1, 150 units; T, 1 per cent v/v, and prepared by the solvent spherule evaporation method was found to be most effective. The effect of insulin-liposome had prolonged action in diabetes-induced rabbits compared with that in normal rabbits. The results of the insulin-liposome system were comparable with the action of 1 unit of insulin/kg administered subcutaneously.