Late stage oxidations during the biosynthesis of the 2-pyridone tenellin in the insect pathogenic fungus Beauveria bassiana were investigated by a combination of gene knockout, antisense RNA, and gene coexpression studies. Open reading frames (ORF) 3 and 4 of the tenellin biosynthetic gene cluster were previously shown to encode a trans-acting enoyl reductase and a hybrid polyketide synthase nonribosomal peptide synthetase (PKS-NRPS), respectively, which together synthesize the acyltetramic acid pretenellin-A. In this work, we have shown that ORF1 encodes a cytochrome P450 oxidase, which catalyzes an unprecedented oxidative ring expansion of pretenellin-A to form the 2-pyridone core of tenellin and related metabolites, and that this enzyme does not catalyze the formation of a hydroxylated precursor. Similar genes appear to be associated with PKS-NRPS genes in other fungi. ORF2 encodes an unusual cytochrome P450 monooxygenase required for the selective N-hydroxylation of the 2-pyridone which is incapable of N-hydroxylation of acyltetramic acids.