The smaller isoform of the GABA synthesizing enzyme glutamic acid decarboxylase, GAD65, is synthesized as a soluble protein that undergoes post-translational modification(s) in the NH2-terminal region to become anchored to the membrane of small synaptic-like microvesicles in pancreatic beta cells, and synaptic vesicles in GABA-ergic neurons. A soluble hydrophilic form, a soluble hydrophobic form, and a hydrophobic firmly membrane-anchored form have been detected in beta cells. A reversible and hydroxylamine sensitive palmitoylation has been shown to distinguish the firmly membrane-anchored form from the soluble yet hydrophobic form, suggesting that palmitoylation of cysteines in the NH2-terminal region is involved in membrane anchoring. In this study we use site-directed mutagenesis to identify the first two cysteines in the NH2-terminal region, Cys 30 and Cys 45, as the sites of palmitoylation of the GAD65 molecule. Mutation of Cys 30 and Cys 45 to Ala results in a loss of palmitoylation but does not significantly alter membrane association of GAD65 in COS-7 cells. Deletion of the first 23 amino acids at the NH2 terminus of the GAD65 30/45A mutant also does not affect the hydrophobicity and membrane anchoring of the GAD65 protein. However, deletion of an additional eight amino acids at the NH2 terminus results in a protein which is hydrophilic and cytosolic. The results suggest that amino acids 24-31 are required for hydrophobic modification and/or targeting of GAD65 to membrane compartments, whereas palmitoylation of Cys 30 and Cys 45 may rather serve to orient or fold the protein at synaptic vesicle membranes.