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We investigated an increase in the number of patient specimens yielding Mycobacterium terrae in 1986, isolation of M. terrae was associated with specimens obtained from inpatients at our new hospital, but not with specimens referred from other hospitals [37(+)/144 inpatient specimens versus 2(+)/26 referred specimens, p less than 0.05]. By October 31, 1987, we had identified 163 positive specimens from 131 patients. All M. terrae were isolated from specimens obtained from non-sterile sites, i.e., respiratory, gastrointestinal, or urine. No clinical disease related to M. terrae occurred. Review of procedures and cultures of solutions used in the Microbiology Laboratory suggested the source of M. terrae was not in the Microbiology Laboratory. An analysis of case location showed an association with hospital tier (p less than 0.05), a pattern matching the design of the potable water system of the hospital. M. terrae was cultured from multiple outlets of this system. There appeared to be multiple modes of transmission of M. terrae from this reservoir. Control measures included avoidance of water sources during specimen collection and hyperchlorination of the potable water system. These measures appeared to result in the disappearance of M. terrae from subsequent clinical specimens. We believe this to be the first report defining the epidemiologic aspects of M. terrae contaminating clinical specimens.