We have cloned the Escherichia coli lipoprotein structural gene (lpp) into a shuttle vector and studied its expression in both E. coli and in Bacillus subtilis. Using in vitro gene fusion techniques, the lpp gene was placed under the control of the promoter for the erythromycin-resistance (ery) gene. This fusion gene directed the synthesis of Braun's prolipoprotein which can be subsequently processed into the mature lipoprotein. In addition to the prolipoprotein, two ery-lpp hybrid proteins containing a 45- and a 22-amino acid extension preceding the NH2 terminus of prolipoprotein, respectively, are also synthesized in E. coli. The synthesis of these three proteins appears to involve the utilization of three distinct translation initiation sites. In B. subtilis, only two proteins are synthesized, the hybrid protein with a 45-amino acid extension and the prolipoprotein. In both E. coli and B. subtilis, the precursor forms of the hybrid proteins are lipid-modified, and they are processed to mature lipoprotein in vivo. These results indicate that internalized signal sequence containing the prolipoprotein modification and processing site (Leu-Ala-Glys-Cys) can function normally and permit the modification of hybrid proteins to lipid-modified precursors which can be subsequently processed by the globomycin-sensitive prolipoprotein signal peptidase.