Theoretical work carried out almost a decade ago proposed that subthreshold oscillations in membrane potential could be used to convert synaptic current strength into a code reliant on action potential (AP) latencies. Using whole-cell recordings we present experimental evidence for the occurrence of prominent network-driven subthreshold theta oscillations in mitral cells of the mouse olfactory bulb. Activity induced by both injected current and sensory input was accurately reflected in initial AP latency from the beginning of each oscillation cycle. In a network model we found that an AP latency code rather than AP number or instantaneous firing rate provided computational speed and high resolution, and was easily implemented. This coding strategy was also found to be invariant to the total input current as long as the relative input intensities to glomeruli remained constant. However, it was highly sensitive to changes in the ratios of the input currents and improved by lateral inhibitory mechanisms. Since the AP latency-based coding scheme was dependent on the subthreshold oscillation we conclude that the theta rhythm serves a functional role in temporally reformatting the strengths and patterns of synaptic input in this sensory system.