Processing of the 'CaaX' motif found on the C-termini of many proteins, including the proto-oncogene Ras, requires the ER (endoplasmic reticulum)-resident protease RCE1 (Ras-converting enzyme 1) and is necessary for the proper localization and function of many of these 'CaaX' proteins. In the present paper, we report that several mammalian species have a novel isoform (isoform 2) of RCE1 resulting from an alternate splice site and producing an N-terminally truncated protein. We demonstrate that both RCE1 isoform 1 and the newly identified isoform 2 are required to reinstate proper H-Ras processing and thus plasma membrane localization in RCE1-null cells. In addition, we show that the deubiquitinating enzyme USP17 (ubiquitin-specific protease 17), previously shown to modulate RCE1 activity, can regulate the abundance and localization of isoform 2. Furthermore, we show that isoform 2 is ubiquitinated on Lys43 and deubiquitinated by USP17. Collectively, the findings of the present study indicate that RCE1 isoform 2 is required for proper 'CaaX' processing and that USP17 can regulate this via its modulation of RCE1 isoform 2 ubiquitination.