Balhimycin, a vancomycin-type antibiotic from Amycolatopsis mediterranei, contains the unusual amino acid (S)-3,5-dihydroxyphenylglycine (Dpg), with an acetate-derived carbon backbone. After sequence analysis of the biosynthetic gene cluster, one gene, dpgA, for a predicted polyketide synthase (PKS) was identified, sharing 20-30% identity with plant chalcone synthases. Inactivation of dpgA resulted in loss of balhimycin production, and restoration was achieved by supplementation with 3,5-dihydroxyphenylacetic acid, which is both a possible product of a PKS reaction and a likely precursor of Dpg. Enzyme assays with the protein expressed in Streptomyces lividans showed that this PKS uses only malonyl-CoA as substrate to synthesize 3,5-dihydroxyphenylacetic acid. The PKS gene is organized in an operon-like structure with three downstream genes that are similar to enoyl-CoA-hydratase genes and a dehydrogenase gene. The heterologous co-expression of all four genes led to accumulation of 3,5-dihydroxyphenylglyoxylic acid. Therefore, we now propose a reaction sequence. The final step in the pathway to Dpg is a transamination. A predicted transaminase gene was inactivated, resulting in abolished antibiotic production and accumulation of 3,5-dihydroxyphenylglyoxylic acid. Interestingly, restoration was only possible by simultaneous supplementation with (S)-3,5-dihydroxyphenylglycine and (S)-4-hydroxyphenylglycine, indicating that the transaminase is essential for the formation of both amino acids.