SMT3 is an essential Saccharomyces cerevisiae gene encoding a 11.5 kDa protein similar to the mammalian ubiquitin-like protein SUMO-1. We have found that Smt3p, like SUMO-1 and ubiquitin, can be attached to other proteins post-translationally and have characterized the processes leading to the activation of the Smt3p C-terminus for conjugation. First, the SMT3 translation product is cleaved endoproteolytically to expose Gly98, the mature C-terminus. The presence of Gly98 is critical for Smt3p's abilities to be conjugated to protein substrates and to complement the lethality of a smt3Delta strain. Smt3p undergoes ATP-dependent activation by a novel heterodimeric enzyme consisting of Uba2p, a previously identified 71 kDa protein similar to the C-terminus of ubiquitin-activating enzymes (E1s), and Aos1p (activation of Smt3p), a 40 kDa protein similar to the N-terminus of E1s. Experiments with conditional uba2 mutants showed that Uba2p is required for Smt3p conjugation in vivo. Furthermore, UBA2 and AOS1 are both essential genes, providing additional evidence that they act in a distinct pathway whose role in cell viability is to conjugate Smt3p to other proteins.