Ras proteins are small GTP binding proteins that serve as critical relays in a variety of signal transduction pathways in eukaryotic cells. Like most metazoan Ras proteins, yeast Ras is post-translationally modified by addition of a farnesyl and a palmitoyl moiety, and these modifications are required for targeting the protein to the cytoplasmic face of the plasma membrane and for biological activity of the protein. We have constructed mutants of the yeast (Saccharomyces cerevisiae) Ras that are farnesylated in vivo but are not palmitoylated. These mutant proteins are not localized to the plasma membrane but function in the cell as well as the wild-type protein. Such mutants are viable but fail to induce a transient increase in intracellular cAMP concentration in response to glucose addition, although this deficiency does not yield a marked growth phenotype. These results are consistent with the hypothesis that the essential role of the farnesyl moiety on yeast Ras is to enhance productive interaction between Ras and its essential downstream target, adenylyl cyclase, rather than to localize Ras to the plasma membrane.