The aim of the present study is to develop and evaluate microemulsion formulations for Terbinafine (TB) with a view to enhance its permeability through the skin and provide release for 24 h. Various o/w microemulsions were prepared by the spontaneous emulsification method. Oleic acid was chosen as the oil phase, Caprylo caproyl macrogol-8- glyceride (Labrasol S) and purified diethylene glycol monoethyl ether (Transcutol P) were used as surfactant and cosurfactant, respectively, on the basis of solubility studies. Pseudoternary phase diagrams were constructed to obtain the concentration range of oil, surfactant, cosurfactant, and water for microemulsion formulation. The optimized microemulsion consisted of 2% w/w TB, 8% w/w oleic acid, 31% w/w labrasol S, 31% w/w transcutol P, and 30% w/w distilled water. Permeability parameters like Jss and Kp were found to be significantly higher for formulation F4 as compared to other formulations (P < 0.05). Microbiological studies of TB in microemulsion showed better anti-fungal activity against Candida albicans and Aspergillus flavus as compared to marketed product (P < 0.05).