The envelope proteins of human immunodeficiency virus (HIV) and simian immunodeficiency virus (SIV) were found to be modified by fatty acylation of the transmembrane protein subunit gp41. The precursor gp160 was also palmitoylated prior to its cleavage into the gp120 and gp41 subunits. The palmitic acid label was sensitive to treatment with hydroxylamine or 2-mercaptoethanol, indicating that the linkage is through a thioester bond. Treatment with cycloheximide did not prevent the incorporation of [3H]palmitic acid into the HIV envelope protein, indicating that palmitoylation is a posttranslation modification. In contrast to other glycoproteins, which are palmitoylated at cysteine residues within or close to the membrane-spanning hydrophobic domain, the palmitoylation of the HIV-1 envelope proteins occurs on two cysteine residues, Cys-764 and Cys-837, which are 59 and 132 amino acids, respectively, from the proposed membrane-spanning domain of gp41. Sequence comparison revealed that one of these residues (Cys-764) is conserved in the cytoplasmic domains of almost all HIV-1 isolates and is located very close to an amphipathic region which has been postulated to bind to the plasma membrane.