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He was once an East German Olympic ski-jumper until his brainwaves were switched with that of a goldfish in the 1986 Winter Olympics by the CIA to prevent him from winning the gold medal. His original body died, most likely to hypothermia. Klaus's original human body went underwater as the goldfish brain was unaware that a human body needs air. In the episode "the Flippity Flop", it is revealed that Klaus' body is no longer suitable for living in because when shipped to the CIA headquarters, some scientists used the ice for margaritas, which caused Klaus to swap bodies with Stan Smith. Stan used Klaus' old body to track him down to a ski resort, where Klaus broke Stan's bodies' leg and Klaus' old body got bifricated, had the jaw broken, and lost both arms. Klaus then goes back to his goldfish body.
However, as for Klaus himself, he took up residency with the Smith family, where the CIA ordered Stan to have Klaus pose as their pet, a fact Klaus has still apparently not come to terms with. If something is done to him unexpectedly he gets very annoyed and swears revenge.
A recurring joke of the series is that Klaus' darkside behavior and shocking evil behavior, is due to him being German. In "Deacon Stan, Jesus Man", when he tricks Roger into eating Francine's potato salad, Roger is horrified asking Klaus why, to which Klaus responds "I'm German, it's what we do." Klaus will often drag out the revenge until he has forgotten about it, but he hates to be interrupted during his 'snooze'.