Aminoacylase is a potent peptidase around pH 8.5. The pH dependence of the Km values reveals that only dipeptides with uncharged N-terminal amino acids are substrates of the enzyme. The Km values reflect the hydrophobicity of the N-terminal amino acids. Calculated on the basis of unprotonated peptides they are pH independent. Hydrophobic, deprotonated amino acids are competitive inhibitors of the enzyme, tryptophan and norleucine being the strongest inhibitors. Inhibitor constants with glycylalanine as substrate have been determined for several amino acids. From the present results it may be deduced that the N-terminal amino acids of dipeptides are bound at a strongly hydrophobic site.