Covalent attachment of lipophilic moieties to proteins influences interaction with membranes and membrane microdomains, as well as signal transduction. The most common forms of fatty acylation include modification of the N-terminal glycine of proteins by N-myristoylation and/or attachment of palmitate to internal cysteine residues. Protein prenylation involves attachment of farnesyl or geranylgeranyl moieties via thio-ether linkage to cysteine residues at or near the C-terminus. Attachment of each of these lipophilic groups is catalyzed by a distinct enzyme or set of enzymes: N-myristoyl transferase for N-myristoylation, palmitoyl acyl transferases for palmitoylation, and farnesyl or geranylgeranyl transferases for prenylation. The distinct nature of the lipid modification determines the strength of membrane interaction of the modified protein as well as the specificity of membrane targeting. Clusters of basic residues can also synergize with the lipophilic group to promote membrane binding and targeting. The final destination of the modified protein is influenced by multiple factors, including the localization of the modifying enzymes, protein/protein interactions, and the lipid composition of the acceptor membrane. In particular, much interest has been focused on the ability of fatty acylated proteins to preferentially partition into membrane rafts, subdomains of the plasma membrane that are enriched in cholesterol and glycosphingolipids. Lipid raft localization is necessary for efficient signal transduction in a wide variety of systems, including signaling by T and B cell receptors, Ras, and growth factor receptors. However, certain membrane subdomains, such as caveolae, can serve as reservoirs for inactive signaling proteins. Heterogeneity in the types of membrane subdomains, as well as in the types of lipophilic groups that are attached to proteins, provide an additional level of complexity in the regulation of signaling by membrane bound proteins.