N-acetyl-aspartyl-glutamate (NAAG) is the most abundant dipeptide in the brain, where it acts as a neuromodulator of glutamatergic synapses by activating presynaptic metabotropic glutamate receptor 3 (mGluR3). Recent data suggest that NAAG is selectively localized to postsynaptic dendrites in glutamatergic synapses and that it works as a retrograde neurotransmitter. NAAG is released in response to glutamate and provides the postsynaptic neuron with a feedback mechanisms to inhibit excessive glutamate signaling. A key regulator of synaptically available NAAG is rapid degradation by the extracellular enzyme glutamate carboxypeptidase II (GCPII). Increasing endogenous NAAG—for instance by inhibiting GCPII—is a promising treatment option for many brain disorders where glutamatergic excitotoxicity plays a role. The main effect of NAAG occurs through increased mGluR3 activation and thereby reduced glutamate release. In the present review, we summarize the transmitter role of NAAG and discuss the involvement of NAAG in normal brain physiology. We further present the suggested roles of NAAG in various neurological and psychiatric diseases and discuss the therapeutic potential of strategies aiming to enhance NAAG levels.