Ab initio quantum mechanical (BM) and molecular dynamics (MD) methods have been used to study the catalytic mechanism of aspartylglucosaminidase (AGA)-catalyzed hydrolysis of an amide bond. QM active-site models were used to calculate the reaction sequences of the acylation and deacylation parts of the catalytic reaction at the MP2/6-31G*//HF/6-31G* level. MD simulations, in which the structures of the active sites were constrained to the geometries obtained from the QM model calculations, were carried out for all the species of the reaction sequence. Structural information from the MD simulations was used in the subsequent QM calculations in which the charge distribution of the protein environment and solvent was included as a set of atomic point charges. These QM calculations provided an estimate of the effects of the protein environment on the energetics of the catalytic reaction. The reaction mechanism was also simulated using a continuum model for the aqueous solvent, in order to differentiate general stabilization of polar and ionic groups from specific stabilization by enzyme groups. Using the results of our QM and MD simulations, we present a detailed mechanism of AGA-catalyzed hydrolysis reactions. The catalytic mechanism of AGA was found to be similar to the well-known mechanism of serine proteases. A novel feature of the mechanism of AGA is that AGA uses O gamma of N-terminal threonine as a nucleophile and the cl-amino group of the terminus as a base in the catalytic reaction. These calculations showed that the protein environment differentially stabilizes the transition states of the reaction. The key transition state-stabilizing residues were Asp47, Lys207, and Arg211. Water molecules made a large contribution to the stabilization of the deacylation part of the reaction. In addition, we discuss how the catalytic nucleophile is activated in the case of AGA and other enzymes with similar catalytic machineries.