A system for the identification of proteases and protease inhibitors is provided. The system has at least two components. The first component is a reporter construct with at least one binding site, a transcriptional promoter, an inducible promoter region, and at least one reporter gene, all functionally connected for expression of the reporter gene(s) in functional coordination with a transcriptional activation agent. The second component is a transcriptional activation agent comprising a nucleic acid binding domain, at least one protease substrate domain, and at least one transcriptional activation domain for an inducible promoter. The system allows detection and evaluation of agents affecting protease activity directed to the protease substrate domain. The system also allows for the detection of the presence of proteases in environmental samples.