In clinical isolates of Enterobacter cloacae, resistance to the newer beta-lactam antibiotics often results from overproduction of a cephalosporinase encoded by the beta-lactam-inducible ampC gene. Regulation of ampC is controlled by the divergently expressed activator gene, ampR, and a second unlinked locus. In this presentation we show that although Escherichia coli has lost its ampR gene it has retained the second regulatory locus and that this comprises the bicistronic ampDE operon. Genetic and biochemical studies define the ampD gene as encoding a repressor for ampC transcription whereas the ampE gene product is a cytoplasmic membrane protein. Inactivation of the AmpD protein by mutation causes massive overproduction of cephalosporinase which, in E. cloacae, can terminate in therapeutic failure. In contrast, loss of AmpE results in a total block in induction, despite the presence of the activator, AmpR.