Cell cycle progression requires the activity of protein kinases and phosphatases at critical points in the cell cycle in all eukaryotes. We have previously reported that the dis2(+) and sds2(+) genes of fission yeast encode redundant catalytic subunits of a type 1-like protein phosphatase. The sds22(+) gene was shown to be essential for cell viability and to interact genetically with dis2(+) and sds21(+). Here we show by immunoprecipitation that the sds22 protein physically interacts with the dis2 and sds21 proteins, and that sds22-associated phosphatase activity has altered substrate specificity, The loss of sds22 function by a temperature sensitive mutation leads to cell cycle arrest at mid-mitosis, at which point cdc2-dependent histone Hl kinase activity is high while sds22-dependent H1 phosphatase activity is low. To examine the unusual properties of sds22 protein structure, we analyzed a collection of sds22 deletion and point mutants by a variety of functional criteria. We propose that sds22 is a regulatory subunit of the dis2/sds21 phosphatase catalytic subunits and that sds22-bound phosphatase carries a key phosphatase activity essential for the progression from metaphase to anaphase. Mutational analysis indicates that dis2/sds21 interacts with the central repetitive domain of sds22, while the C-terminal and central regions of sds22 may be involved in subcellular targeting and the N-terminus is important for stability.