Proteins anchored to the cell membrane via a glycosylphosphatidylinositol (GPI) moiety are found in all eukaryotes. After NH2-terminal peptide cleavage of the nascent protein by the signal peptidase, a second COOH-terminal signal peptide is cleaved with the concomitant addition of the GPI unit. The proposed mechanism of the GPI transfer is a transamidation reaction that involves the formation of an activated carbonyl intermediate (enzyme-substrate complex) with the ethanolamine moiety of the preassembled GPI unit serving as a nucleophile. Other nucleophilic acceptors like hydrazine (HDZ) and hydroxylamine have been shown to be possible alternate substrates for GPI. Since GPI has yet to be purified, the use of readily available nucleophilic substitutes such as HDZ and hydroxylamine is a viable alternative to study COOH-terminal processing by the putative transamidase. As a first step in developing a soluble system to study this process, we have examined the amino acid requirements at the COOH terminus for the transamidation reaction using HDZ as the nucleophilic acceptor instead of GPI. The hydrazide-forming reaction shows identical amino acid requirement profiles to that of GPI anchor addition. Additionally, we have studied other parameters relating to the kinetics of the transamidation reaction in the context of rough microsomal membranes. The findings with HDZ provide further evidence for the transamidase nature of the enzyme and also provide a starting point for development of a soluble assay.