The enzyme apolipoprotein N-acyltransferase (Lnt) is an integral membrane protein that catalyzes the last step in the post-translational modification of bacterial lipoproteins. Lnt undergoes covalent modification in the presence of phospholipids resulting in a thioester acyl-enzyme intermediate. It then transfers the acyl chain to the α-amino group of the N-terminal diacylglyceryl-modified cysteine of apolipoprotein, leading to the formation of mature triacylated lipoprotein. To gain insight into the catalytic mechanism of this two-step reaction, we overproduced and purified the enzyme of Escherichia coli and studied its N-acyltransferase activity using a novel in vitro assay. The purified enzyme was fully active, as judged by its ability to form a stable thioester acyl-enzyme intermediate and N-acylate the apo-form of the murein lipoprotein Lpp in vitro. Incorporation of [(3)H]palmitate and mass spectrometry analysis demonstrated that Lnt recognized the synthetic diacylglyceryl-modified lipopeptide FSL-1 as a substrate in a mixed micelle assay. Kinetics of Lnt using phosphatidylethanolamine as an acyl donor and FSL-1 as a substrate were consistent with a ping-pong type mechanism, demonstrating slow acyl-enzyme intermediate formation and rapid N-acyl transfer to the apolipopeptide in vitro. In contrast to earlier in vitro observations, the N-acyltransferase activity was strongly affected by the phospholipid headgroup and acyl chain composition.