Ion channels and associated signal transduction cascades are clustered at excitatory synapses by PSD-95 and related PDZ-containing proteins. Mechanisms that target PSD-95 to synaptic membranes, however, are unknown. Here, PSD-95 is shown to partition as an integral membrane protein in brain homogenates. Metabolic labeling of brain slices or cultured cells demonstrates that PSD-95 is modified by thioester-linked palmitate, a long chain fatty acid that targets proteins to cell membranes. In fact, PSD-95 is a major palmitoylated protein in intact cells, and palmitoylated PSD-95 partitions exclusively with cell membranes. Mutagenesis indicates that palmitoylation of PSD-95 occurs on conserved N-terminal cysteines 3 and 5. Palmitoylation-deficient mutants of PSD-95 do not partition as integral membrane proteins and do not participate in PDZ-ion channel interactions in vivo. This work identifies palmitoylation as a critical regulatory mechanism for receptor interactions with PSD-95.