Azithromycin, an important member of the azalide subclass is effective against both Gram-positive and Gram-negative organisms. Certain physicochemical properties of the drug like poor water solubility and relatively low bioavailability of 37% due to incomplete absorption after ingestion, aroused the need for the development of a novel drug delivery system to enhance the solubilization potential and antibacterial activity against Staphylococcus aureus at a very low concentration. Cinnamon oil (Cinnamonum zeylanicum)-based microemulsion system formulated using non-ionic surfactant, Tween 20, and water was characterized. The drug-incorporated system F4 (oil to surfactant ratio of 1:4 (v/v)) showed enhanced solubilization of the drug, droplet diameter of 5-8 nm, and a good thermodynamic stability. The effect of surfactant concentration exhibited a negative correlation with droplet size diameter and turbidity and a positive correlation with stability and viscosity. The system was investigated for its antibacterial activity that demonstrated a significantly higher activity at a minimum concentration (4 μg/ml) of the novel drug-loaded system in comparison with the conventional formulation (128 μg/ml). Examination through scanning electron microscopy analysis further confirmed a considerable morphologic variation due to alteration in the membrane permeability of the microemulsion-treated system. The small droplet size of the microemulsion system and the antibacterial property of cinnamon oil, together, accounts clearly for the enhanced efficacy of the new formulated system F4 and not just azithromycin alone. Staining with acridine orange/ethidium bromide dyes as examined through fluorescence microscopy also substantiated with the results of membrane permeability of bacteria. Thus, our study discloses a potential oral drug delivery system of azithromycin with improved biocompatibility. © 2013 American Association of Pharmaceutical Scientists.