Although it is well-established that modification of Ras by farnesol is a critical step for its membrane association and transforming activity, the contribution of other C-terminal sequences and palmitate modification to Ras localization and function remains unclear. We have characterized H-Ras mutant proteins with alterations in the palmitoylated cysteines or in sequences flanking these residues. We found that non-palmitoylated proteins were impaired not only in membrane association but also in transforming activity. Mutations which drastically altered residues adjacent to the palmitoylated cysteine did not abolish palmitoylation. However, despite continued lipid modification the mutant proteins failed to bind to plasma membranes and instead accumulated on internal membranes and, importantly, were not transforming. Addition of an N-terminal myristoylation signal to these defective mutants, or to proteins entirely lacking the C-terminal 25 residues restored both plasma membrane association and transforming activity. Thus, H-Ras does not absolutely require prenylation or palmitoylation nor indeed its hypervariable domain in order to interact with effectors that ultimately cause transformation. However, in this native state, the C-terminus appears to provide a combination of lipids and a previously unrecognized signal for specific plasma membrane targeting that are essential for the correct localization and biological function of H-Ras.