Association of oncogenic ras proteins with cellular membranes appears to be a crucial step in transformation, ras is synthesized as a cytosolic precursor, which is processed to a mature form that localizes to the plasma membrane. This processing involves, in part, a conserved sequence, Cys-Ali-Ali-Xaa (in which Ali is an amino acid with an aliphatic side chain and Xaa is any amino acid), at the COOH terminus of ras proteins. Yeast a-factor mating hormone precursor also possesses a COOH-terminal Cys-Ali-Ali-Xaa sequence. However, while the COOH-terminal cysteine has been implicated as a site of palmitoylation of ras proteins, in mature a-type mating factor this residue is modified by an isoprenoid, a farnesyl moiety. We asked whether the Cys-Ali-Ali-Xaa sequence signaled different modifications for the yeast peptides (farnesylation) than for ras proteins (palmitoylation) or whether ras proteins were similar to the mating factors and contained a previously undiscovered isoprenoid. We report here that the processing of ras proteins involves addition of a farnesyl moiety, apparently at the COOH-terminal cysteine analogous to the cysteine modified in the yeast peptides, and that farnesylation may be important for membrane association and transforming activity of ras proteins.