Two genes, cmcI and cmcJ, corresponding to open reading frames 7 and 8 (ORF7 and ORF8) of the cephamycin C cluster of Nocardia lactamdurans encode enzymes that convert cephalosporin C to 7-methoxycephalosporin C. Proteins P7 and P8 (the products of ORF7 and ORF8 expressed in Streptomyces lividans) introduce the methoxyl group at C-7 of the cephem nucleus. Efficient hydroxylation at C-7 and transfer of the methyl group from S-adenosylmethionine require both proteins P7 and P8, although P7 alone shows weak C-7 hydroxylase activity and strong cephalosporin-dependent NADH oxidase activity. Both P7 and P8 appear to be synthesized in a coordinated form by translational coupling of cmcI and cmcJ. Protein P7 contains domains that correspond to conserved sequences in cholesterol 7 alpha-monooxygenases and to the active center of O-methyltransferases by comparison with the crystal structure of catechol-O-methyltransferase. Protein P8 may act as a coupling protein for efficient hydroxylation at C-7 in a form similar to that of the two-component system of Pseudomonas putida p-hydroxyphenylacetate-3-hydroxylase.