The catalytic residue of eukaryotic and prokaryotic sulfatases is a ␣-formylglycine. In the sulfatase of Klebsiella pneumoniae the formylglycine is generated by posttranslational oxidation of serine 72. We cloned the atsBA operon of K. pneumoniae and found that the sulfatase was expressed in inactive form in Escherichia coli transformed with the structural gene (atsA). Coexpression of the atsB gene, however, led to production of high sulfatase activity, indicating that the atsB gene product plays a posttranslational role that is essential for the sulfatase to gain its catalytic activity. This was verified after purification of the sulfatase from the periplasm of the cells. Peptide analysis of the protein expressed in the presence of AtsB revealed that half of the polypeptides carried the formylglycine at position 72, while the remaining polypeptides carried the encoded serine. The inactive sulfatase expressed in the absence of AtsB carried exclusively serine 72, demonstrating that the atsB gene is required for formylglycine modification. This gene encodes a 395-amino acid residue iron sulfur protein that has a cytosolic localization and is supposed to directly or indirectly catalyze the oxidation of the serine to formylglycine.