We have previously shown that Bacillus licheniformis prepenicillinase is modified and processed to form membrane-bound penicillinase in Escherichia coli which contains N-acylglyceride-cysteine27 at the NH2 terminus. In the present study, we have constructed, by in vitro site-directed mutagenesis, two mutant penicillinase genes in which the modification site (the 27th cysteine residue in prepenicillinase) is either converted into serine (penPSer27) or is deleted along with the preceding four residues (Ala23 to Cys27, delta penP2327). The modification, processing, and subcellular localization of these two mutant penicillinases in E. coli cells were studied. Our results indicate that the delta penP2327 deletion mutant prepenicillinase is largely metabolically inert and the unmodified and uncleaved form is associated with the membrane fraction; a small fraction (about 7-9%) appears to contain glyceride-modified prepenicillinase (presumably at the Cys-21 position) which is not cleaved. In contrast, the Cys-27 in equilibrium Ser-27 point mutant prepenicillinase is processed into two forms which contain Asn-29 and Ser-35 at their NH2 termini, respectively, and the bulk of the processed penicillinase appears to be located in the peri-plasm. These results are discussed in terms of the substrate specificities of signal peptidases in E. coli.