Agrocybe aegerita peroxidase/peroxygenase (AaP) is an extracellular fungal biocatalyst that selectively hydroxylates the aromatic ring of naphthalene. Under alkaline conditions, the reaction proceeds via the formation of an intermediary product with a molecular mass of 144 and a characteristic UV absorption spectrum (Amax 210, 267, and 303 nm). The compound was semistable at pH 9 but spontaneously hydrolyzed under acidic conditions (pH <7) into 1-naphthol as major product and traces of 2-naphthol. Based on these findings and literature data, we propose naphthalene 1,2-oxide as the primary product of AaP-catalyzed oxygenation of naphthalene. Using 18O-labeled hydrogen peroxide, the origin of the oxygen atom transferred to naphthalene was proved to be the peroxide that acts both as oxidant (primary electron acceptor) and oxygen source.