The purpose of this study was to fabricate a triple-component nanocomposite system consisting of chitosan, polyethylene glycol (PEG), and drug for assessing the application of chitosan-PEG nanocomposites in drug delivery and also to assess the effect of different molecular weights of PEG on nanocomposite characteristics. The casting/solvent evaporation method was used to prepare chitosan-PEG nanocomposite films incorporating piroxicam-β-cyclodextrin. In order to characterize the morphology and structure of nanocomposites, X-ray diffraction technique, scanning electron microscopy, thermogravimetric analysis, and Fourier transmission infrared spectroscopy were used. Drug content uniformity test, swelling studies, water content, erosion studies, dissolution studies, and anti-inflammatory activity were also performed. The permeation studies across rat skin were also performed on nanocomposite films using Franz diffusion cell. The release behavior of films was found to be sensitive to pH and ionic strength of release medium. The maximum swelling ratio and water content was found in HCl buffer pH 1.2 as compared to acetate buffer of pH 4.5 and phosphate buffer pH 7.4. The release rate constants obtained from kinetic modeling and flux values of ex vivo permeation studies showed that release of piroxicam-β-cyclodextrin increased with an increase in concentration of PEG. The formulation F10 containing 75% concentration of PEG showed the highest swelling ratio (3.42±0.02) in HCl buffer pH 1.2, water content (47.89±1.53%) in HCl buffer pH 1.2, maximum cumulative drug permeation through rat skin (2405.15±10.97 μg/cm) in phosphate buffer pH 7.4, and in vitro drug release (35.51±0.26%) in sequential pH change mediums, and showed a significantly (p<0.0001) higher anti-inflammatory effect (0.4 cm). It can be concluded from the results that film composition had a particular impact on drug release properties. The different molecular weights of PEG have a strong influence on swelling, drug release, and permeation rate. The developed films can act as successful drug delivery approach for localized drug delivery through the skin.