In order to develop an aqueous two-phase system (ATPS) for cephalexin synthesis with extractive bioconversion, the partitioning behaviour of cephalexin and 7-aminodeacetoxicephalosporanic acid (7-ADCA) in poly(ethylene glycol) (PEG)/salt ATPS were examined. Parameters such as PEG size, salt type and tie line length were investigated to find a primary extraction system. In PEG400/ammonium sulfate and PEG400/magnesium sulfate systems, the partition coefficient of cephalexin (K-C) was larger than 1 while that of 7-ADCA (K-A) deviated about 1.5. Addition of neutral salts, surfactants and water-miscible solvents were also investigated in the primary ATPS in order to improve the separation efficiency. K-C greatly increased when neutral salts and surfactants were added to the PEG400/ammonium sulfate primary systems whereas K-A was only slightly higher than that of the additive-free ATPS. In an improved ATPS for extractive bioconversion, consisting of PEG400 (20% w/w), ammonium sulfate (17.5% w/w), methanol (5% w/w) and NaCl (3% w/w), a K-C value of up to 15.2 was achieved; K-A was 1.8; K-P (partition coefficient of phenylglycine methyl ester) was 1.2 and the recovery yield of cephalexin was 94.2%. The results obtained from the extractive bioconversion of cephalexin in the improved ATPS showed that it is feasible to perform such an enzymatic process in an ATPS and the system offers the potential as a model for enzymatic synthesis of some water soluble products.