Lipid-based drug delivery systems, a well-tolerated class of formulations, have been evaluated extensively to enhance the bioavailability of poorly soluble drugs. However, it has been difficult to predict the in vivo performance of lipid dosage forms based on conventional in vitro techniques such as cell monolayer permeability studies because of the complexity of the gastrointestinal processing of lipid formulations. In the current study, we explored the feasibility of coupling Caco-2 and Madin-Darby canine kidney monolayer permeability studies with lipolysis, a promising in vitro technique to evaluate lipid systems. A self-emulsifying lipid delivery system was formulated using a blend of oil (castor oil), surfactant (Labrasol® or PL497), and co-surfactant (lecithin). Formulations demonstrating high drug solubility and rapid self-emulsification were selected to study the effect of lipolysis on in vitro cell permeability. Lipolysis of the formulations was carried out using pancreatin as the digestive enzyme. All the digested formulations compromised monolayer integrity as indicated by lowered trans-epithelial electrical resistance (TEER) and enhanced Lucifer yellow (LY) permeability. Further, the changes in TEER value and LY permeability were attributable to the digestion products of the formulation rather than the individual lipid excipients, drug, digestion enzyme, or the digestion buffer. The digested formulations were fractionated into pellet, oily phase, and aqueous phase, and the effect of each of these on cell viability was examined. Interestingly, the aqueous phase, which is considered important for in vivo drug absorption, was responsible for cytotoxicity. Because lipid digestion products lead to disruption of cell monolayer, it may not be appropriate to combine lipolysis with cell monolayer permeability studies. Additional in vivo studies are needed to determine any potential side effects of the lipolysis products on the intestinal permeability barrier, which could determine the suitability of lipid-based systems for oral drug delivery.