The neural cell adhesion molecule N-CAM is expressed at key sites during embryonic development and mediates homophilic adhesion between cells both in the embryo and in the adult. N-CAM is expressed in multiple forms and two of the major isoforms differ in their cytoplasmic domains, one (ld form) having an insert of 261 amino acids that is missing in the other (sd form). N-CAM has been previously shown to be palmitoylated, but the sites of acylation have not been localized. We show here that the cytoplasmic domain of the N-CAM became palmitoylated after transfection of a cDNA encoding N-CAM into COS-7 cells, and that this acylation occurs on the four closely spaced cysteines in the cytoplasmic domain of N-CAM. Moreover, when a cDNA encoding only the cytoplasmic domain was transfected into cells, the protein was palmitoylated and associated with membranes even though it lacked a membrane spanning segment. Site directed mutagenesis of the four cysteine residues to serines at positions 5, 11, 16, and 22 in the cytoplasmic domain (723, 729, 734, and 740 in the native protein) eliminated both the palmitoylation and association with the membrane fraction. Mutagenesis of the cysteines individually, in pairs, and in groups of three indicated that C5 is not acylated with either palmitate or oleate, but the other three cysteines are acylated to different extents. Cytoplasmic domains with single cysteine mutations localized primarily in the membrane fraction, while those with three mutations were found primarily in the cytoplasm. Proteins containing two mutated cysteines were found in both the cytoplasm and the membrane fraction with C11 and C16 having the most influence on the distribution in accord with their higher level of acylation. Mutation of the cysteines did not affect the ability of full-length N-CAM to promote aggregation when transfected into COS-7 cells. Based on these results we suggest that the primary role of palmitoylation is to provide a second anchor in the plasma membrane to direct the protein to discrete membrane microdomains or to organize the cytoplasmic region for interaction with factors that affect signaling events resulting from N-CAM mediated adhesion.