The mechanism of naphthalene oxidation by the filamentous fungus, Cunninghamella elegans is described. C. elegans oxidized naphthalene predominately to trans-1,2-dihydroxy-1,2-dihydroxy-1,2-dihydronaphthalene. A trans configuration was assigned for the dihydrodiol by nuclear magnetic resonance (NMR) spectroscopy at 500 MHz which showed a large coupling constant (J1,2) of 11.0 Hz. Comparison of the circular dichroism spectrum of the fungal trans-1,2-dihydroxy-1,2-dihydronaphthalene to that formed by mammalian enzyme systems indicated that the fungal dihydrodiol contained 76% (+)-(1S,2S)-dihydrodiol as the predominant enantiomer. Other naphthalene metabolites formed by C. elegans were identified as 1-naphthol, 2-naphthol and 4-hydroxy-1-tetralone. Incubation of C. elegans with naphthalene and 18O2 indicated that the trans-1,2-dihydroxy-1,2-dihydronaphthalene contained one atom of molecular oxygen which indicated a monooxygenase catalyzed reaction while similar incubations with naphthalene and H182O indicated that the other oxygen atom in trans-1,2-dihydroxy-1,2-dihydronaphthalene was derived from water. Mass spectral analysis of the acid-catalyzed dehydration products of the dihydrodiol indicated that the naphthalene dihydrodiol forms via the addition of water at the C-2 position of naphthalene-1,2-oxide. Fungal metabolism of [1-2H]naphthalene yielded 1-naphthol which retained 78% of the deuterium. NMR analysis of the deuterated 1-naphthol indicated an NIH shift mechanism in which deuterium migrated from the C-1 position to the C-2 position. The above results indicate that naphthalene-1,2-oxide is an intermediate in the fungal metabolism of naphthalene and that the fungal enzymes are highly stereo-selective in the formation of trans-1,2-dihydroxy-1,2-dihydronaphthalene.