Prenylated proteins contain a covalently linked cholesterol intermediate near their carboxyl-termini. Maturation of most prenylated proteins involves proteolytic removal of the last three amino acids. Two genes in Saccharomyces cerevisiae, RCE1 and AFC1, were identified that appear to be responsible for this processing. The Afc1 protein is a zinc protease that participates in the processing of yeast a-factor mating pheromone. The Rce1 protein contributes to the processing of both Ras protein and a-factor. Deletion of both AFC1 and RCE1 resulted in the loss of proteolytic processing of prenylated proteins. Disruption of RCE1 led to defects in Ras localization and signaling and suppressed the activated phenotype associated with the allele RAS2^val19.