The membrane associated endoprotease, hRCE1, is responsible for one step in Ras membrane localization. The "CAAX" sequence at the C-terminal of farnesylated Ras proteins is cleaved by hRCE1 to yield an AAX tri-peptide. We found that an 8-aa K-Ras-derived "CAA" peptide, KSKTKC(farnesyl)VI, was a better substrate for hRCE1 than a KSKTKC(f)VIM "CAAX" peptide. When we examined hRCE1 activity on the same K-Ras core peptide with H-Ras (VLS) or N-Ras (VVM) C-terminal AAX sequences, we also found that in each case, the CAA peptides were better hRCE1 substrates. For each peptide set we examined, the P2' (A) and P3' (X) positions appeared independent in influencing hRCE1 activity on peptide substrates. We found that at the P3' position, methionine was better than serine; while at the P2' position, isoleucine and valine were better than leucine. Additionally, we found that a similar noncleaved peptide (modified at P'2 with a nitrophenyl group) could act as a competitive inhibitor of the reaction. Thus, hRCE1 has important functional interaction with the P2' and P3' substrate positions in addition to the farnesylated cysteine at the scissile bond site. This data could be useful in design of peptidomimetic inhibitors of hRCE1. Such inhibitors may be useful in treatment of cancer and inflammatory disease.