Post-translational modification by isoprenylation is a pivotal process for the correct functioning of many signalling proteins. The Drosophila melanogaster cGMP-PDE (cGMP-specific phosphodiesterase) DmPDE5/6 possesses a CaaX-box prenylation signal motif, as do several novel cGMP-PDEs from insect and echinoid species (in CaaX, C is cysteine, a is an aliphatic amino acid and X is ‘any’ amino acid). DmPDE5/6 is prenylated in vivo at Cys1128 and is localized to the plasma membrane when expressed in Drosophila S2 cells. Site-directed mutagenesis of the prenylated cysteine residue (C1128S-DmPDE5/6), pharmacological inhibition of prenylation or co-expression of DmPrBP (Drosophila prenyl-binding protein)/δ each alters the subcellular localization of DmPDE5/6. Thus prenylation constitutes a critical post-translational modification of DmPDE5/6 for membrane targeting. Co-immunoprecipitation and subcellular-fractionation experiments have shown that DmPDE5/6 interacts with DmPrBP/δ in Drosophila S2 cells. Transgenic lines allow targeted expression of tagged prenylation-deficient C1128S-DmPDE5/6 in Type I (principal) cells in Drosophila Malpighian tubules, an in vivo model for DmPDE5/6 function. In contrast with wild-type DmPDE5/6, which was exclusively associated with the apical membrane, the C1128S-DmPDE5/6 mutant form was located primarily in the cytosol, although some residual association occurred at the apical membrane. Despite the profound change in intracellular localization of C1128S-DmPDE5/6, active transport of cGMP is affected in the same way as it is by DmPDE5/6. This suggests that, in addition to prenylation and interaction with DmPrBP/δ, further functional membrane-targeting signals exist within DmPDE5/6.