Protein domains play a fundamental role in the spatial and temporal organization of intracellular signaling systems. While protein phosphorylation has long been known to modify the interactions that underlie this organization, the dynamic cycling of lipids should now be included amongst the posttranslational processes determining specificity in signal transduction. The characteristics of this process are reminiscent of the properties of protein and lipid phosphorylation in determining compartmentalization through SH2 or PH domains. Recent studies have confirmed the functional importance of protein S-palmitoylation in the compartmentalization of signaling molecules that support normal physiological function in cell division and apoptosis, and synaptic transmission and neurite outgrowth. In neurons, S-palmitoylation and targeting of proteins to rafts are regulated differentially in development by a number of processes, including some related to synaptogenesis and synaptic plasticity. Alterations in the S-palmitoylation state of proteins substantially affect their cellular function, raising the possibility of new therapeutic targets in cancer and nervous system injury and disease.