1) The enzymatic demethylation of caffeine (1,3,7-trimethylxanthine) by Pseudomonas putida C1 was investigated; an inducible enzyme system has been observed. This enzyme shows an optimum pH of about 6.0, and the optimum temperature is in the range of 22-24 degrees C. The enzyme is absolutely dependent on NADH or NADPH as a cosubstrate and is activated by CO2+. 2) The formaldehyde generated by the demethylation of caffeine is oxidized by an NAD-dependent formaldehyde dehydrogenase, which is independent of Mg2+ and glutathione. The enzyme was purified from cell-free extracts of Pseudomonas putida C1 by DEAE-cellulose, Sephadex G-150 and Sephadex A-50 chromatography. The purified enzyme was homogeneous as judged by polyacrylamide gel electrophoresis and was most active at a pH between 8.5 and 9.0. The molecular weight was estimated to be about 250,000 by the gel filtration method. Kinetic analysis gave KM values of about 0.2 mM for formaldehyde and 0.5 mM for NAD+.