Whole cells of the yeast Rhodotorula gracilis ATCC 26217 exhibited low D-amino acid oxidase (DAAO) and catalase activities due to the membrane permeability barrier for D-amino acids and hydrogen peroxide (H2O2). The permeability barrier for the substrates was decreased by treating the yeast with detergents and organic solvents. Treatment with cetyltrimethylammonium bromide (CTAB) gave maximum enzyme activities. R. gracilis cells grown in a basal organic medium (medium I) in the presence of D-alanine (induction method A) yielded maximum DAAO (160 U/g) and catalase (6356 U/g) activities compared to cells grown in synthetic mineral medium (medium IT) and later induced by exposing the harvested cells to D-alanine (induction method B, DAAO: 115 U/g and catalase 1982 U/g). The former cells readily converted D-phenylalanine predominately to phenylpyruvate (97%) with the formation of about 3% of phenylacetic acid, whereas the latter cells produced significant amounts of phenylacetic acid (30%). CTAB-permeabilized cells which were grown in medium I and induced by method A were also used for the simultaneous formation of phenylpyruvate and L-phenylalanine from DL-phenylalanine. CTAB-cells were reused upto three cycles for the bioconversion reaction.