The Rag1 and Rag2 proteins initiate V(D)J recombination by introducing site-specific DNA double-strand breaks. Cleavage occurs by nicking one DNA strand, followed by a one-step transesterification reaction that forms a DNA hairpin structure. A similar reaction allows Rag transposition, in which the 3'-OH groups produced by Rag cleavage are joined to target DNA. The Rag1 active site DDE triad clearly plays a catalytic role in both cleavage and transposition, but no other residues in Rag1 responsible for transesterification have been identified. Furthermore, although Rag2 is essential for both cleavage and transposition, the nature of its involvement is unknown. Here, we identify basic amino acids in the catalytic core of Rag1 specifically important for transesterification. We also show that some Rag1 mutants with severe defects in hairpin formation nonetheless catalyze substantial levels of transposition. Lastly, we show that a catalytically defective Rag2 mutant is impaired in target capture and displays a novel form of coding flank sensitivity. These findings provide the first identification of components of Rag1 that are specifically required for transesterification and suggest an unexpected role for Rag2 in DNA cleavage and transposition.