Keratinocyte transglutaminase is anchored on the cytosolic side of the plasma membrane by fatty acid thioesterification near the amino terminus, a process which is seen to occur within 30 min of synthesis. The importance of a cluster of five cysteines (residues 47, 48, 50, 51, and 53) where acylation was presumed to occur is now demonstrated by site-directed mutagenesis. Transglutaminase mutants in which the cluster is deleted or the cysteines are all converted to alanine or serine are cytosolic. Partial replacement of the cluster, leaving two contiguous cysteines, is sufficient to confer membrane anchorage, while a single cysteine is only partially effective. As demonstrated with a soluble transglutaminase mutant, membrane anchorage confers susceptibility of the amino-terminal region to phorbol ester-stimulated phosphorylation. Attachment of 105 residues from the transglutaminase amino terminus to involucrin, a highly soluble protein, results in membrane anchorage of the hybrid protein. Attachment of the cysteine cluster alone does not result in membrane attachment of involucrin, but a 32-residue segment containing this cluster is sufficient. Stable transfectants of the human transglutaminase in mouse 3T3 cells are membrane-bound, indicating the fatty acid transacylation is not keratinocyte-specific.