Lactococcus lactis is a nonpathogenic AT-rich gram-positive bacterium closely related to the genus Streptococcus and is the most commonly used cheese starter. It is also the best-characterized lactic acid bacterium. We sequenced the genome of the laboratory strain IL1403, using a novel two-step strategy that comprises diagnostic sequencing of the entire genome and a shotgun polishing step. The genome contains 2,365,589 base pairs and encodes 2310 proteins, including 293 protein-coding genes belonging to six prophages and 43 insertion sequence (IS) elements. Nonrandom distribution of IS elements indicates that the chromosome of the sequenced strain may be a product of recent recombination between two closely related genomes. A complete set of late competence genes is present, indicating the ability of L. lactis to undergo DNA transformation. Genomic sequence revealed new possibilities for fermentation pathways and for aerobic respiration. It also indicated a horizontal transfer of genetic information from Lactococcus to gram-negative enteric bacteria of Salmonella-Escherichia group.