Prenylated proteins contain either a 15-carbon farnesyl or a 20-carbon geranylgeranyl isoprenoid covalently attached via a thioether bond to a cysteine residue at or near their C terminus. As prenylated proteins comprise up to 2% of the total protein in eukaryotic cells, and the thioether bond is a stable modification, their degradation raises a metabolic challenge to cells. A lysosomal enzyme termed prenylcysteine lyase has been identified that cleaves prenylcysteines to cysteine and an unidentified isoprenoid product. Here we show that the isoprenoid product of prenylcysteine lyase is the C-1 aldehyde of the isoprenoid moiety (farnesal in the case of C-15). The enzyme requires molecular oxygen as a cosubstrate and utilizes a noncovalently bound flavin cofactor in an NAD(P)H-independent manner. Additionally, a stoichiometric amount of hydrogen peroxide is produced during the reaction. These surprising findings indicate that prenylcysteine lyase utilizes a novel oxidative mechanism to cleave thioether bonds and provide insight into the unique role this enzyme plays in the cellular metabolism of prenylcysteines.