When Ac(2)-l-Lys-d-Ala-d-Ala and either meso-diaminopimelic acid or Gly-l-Ala are exposed to the exocellular dd-carboxypeptidase-transpeptidase of Streptomyces R61, transpeptidation reactions yielding Ac(2)-l-Lys-d-Ala-(d)-meso- diaminopimelic acid and Ac(2)-l-Lys-d-Ala-Gly-l-Ala occur concomitantly with the hydrolysis of the tripeptide into Ac(2)-l-Lys-d-Ala. The proportion of the enzyme activity which can be channelled in the transpeptidation and the hydrolysis pathways depends upon the pH and the polarity of the environment. Transpeptidation is favoured both by increasing the pH and by decreasing the water content of the reaction mixtures. Kinetics suggest that the reactions proceed through an ordered mechanism in which the acceptor molecule (meso-diaminopimelic acid or Gly-l-Ala) binds first to the enzyme. Both acceptors behave as non-competitive inhibitors of the hydrolysis pathway. Transpeptidation is inhibited by high concentrations of Gly-l-Ala but not by high concentrations of meso-diaminopimelic acid. The occurrence on the enzyme of an additional inhibitory binding site for Gly-l-Ala is suggested.