The present study is aimed at evaluating the transdermal route as an alternative to the oral route for improving the systemic bioavailability and sustaining the constant therapeutic plasma level of Zidovudine (AZT). Elastic liposomal formulations of AZT were prepared and characterized. The effect of different formulation variables on transdermal delivery of AZT from elastic liposomes was studied. To investigate the mechanism of skin permeation of elastic liposomes, Transmission Electron Microscopic (TEM) study was carried out. The optimized elastic liposomal formulation showed transdermal flux of 98.8+/-5.8 microg/cm2/hr across rat skin as compared to 5.72+/-0.3 microg/cm2/hr for free drug. Vesicle-skin interaction study showed that elastic vesicles influenced the ultra structure of stratum corneum. Distinct regions with lamellar stacks derived from vesicles were observed in intercellular spaces of the stratum corneum. These stacks disrupted the organization of skin bilayers leading to increased skin permeability, whereas no changes were observed in the underlying viable epidermis and dermis. Improved pharmacokinetic profile was observed when AZT was entrapped in elastic liposomes. The AUC0-24h for elastic liposomal formulation was found to be (12.63+/-1.2 microg h/mL), nearly twelve fold higher than the control (0.83+/-0.2 microg h/mL). Furthermore, the administration of elastic liposome encapsulated AZT resulted in substantially higher accumulation of AZT in target RES organs that play a key role in the pathogenesis of AIDS by providing long-term reservoir for the virus. The results of the present study demonstrated that elastic liposomes increased the transdermal flux, prolonged the release, improved the site specificity of AZT and represented an attractive strategy for sustained and targeted delivery of AZT.