When an aqueous nonionic surfactant micelle solution is at a temperature above its cloud point (CP) or in presence of certain additives, phase separation occurs to from a surfactant diluted phase and a coacervate phase. This system is known as cloud point system. The paper focused on a cloud point system consisting of nonionic surfactant Triton X-100 and Triton X-114, which used as a novel two-phase partitioning bioreactor for biotransformation. The biocompatibility of Mycobacterium sp. cells in the system was investigated and a biotransformation of cholesterol into androsta-1, 4-diene-3, 17-dione (ADD) and androst-4-ene-3, 17-dione (AD) by resting cells in this system was carried out. The cells catalyze the biotransformation and further degradation of products. By determination of the substrate concentration, surfactant concentration and cell concentration on the specific ADD accumulation activity, the cloud point system can be used as a tool to improve the efficiency of biotransformation. It extracted products from cells to the coacervate phase, which could protect the product from degradation and eliminate product inhibition on the microorganism. By controlling delivery, the uneven partition of substrate in the two-phase system made the substrate concentration in the dilute phase to maintain a moderate level, which improved the mass transfer of substrate and eliminate substrate inhibition on the microorganism. (C) 2004 Elsevier Inc. All rights reserved.