While most receptor tyrosine kinases signal by recruiting SH2 proteins directly to phosphorylation sites on their plasma membrane receptor, the insulin receptor phosphorylates intermediary IRS proteins that are distributed between the cytoplasm and a state of loose association with intracellular membranes. To determine the importance of this distribution to IRS-1-mediated signaling, we constructed a prenylated, constitutively membrane-bound IRS-1 by adding the COOH-terminal 9 amino acids from p21(ras), including the CAAX motif, to IRS-1 (IRS-CAAX) and analyzed its function in 32D cells expressing the insulin receptor. IRS-CAAX migrated more slowly on sodium dodecyl sulfate-polyacrylamide gel electrophoresis than did IRS-1 and demonstrated increased levels of serine/threonine phosphorylation. Insulin-stimulated tyrosyl phosphorylation of IRS-CAAX was slightly decreased, while IRS-CAAX-mediated phosphatidylinositol 3'-kinase (PI3'-kinase) binding and activation were decreased by approximately 75% compared to those for wild-type IRS-1. Similarly, expression of IRS-CAAX desensitized insulin-stimulated [(3)H]thymidine incorporation into DNA by about an order of magnitude compared to IRS-1. By contrast, IRS-CAAX-expressing cells demonstrated increased signaling by mitogen-activated protein kinase, Akt, and p70(S6) kinase in response to insulin. Hence, tight association with the membrane increased IRS-1 serine phosphorylation and reduced coupling between the insulin receptor, PI3'-kinase, and proliferative signaling while enhancing other signaling pathways. Thus, the correct distribution of IRS-1 between the cytoplasm and membrane compartments is critical to the normal balance in the network of insulin signaling.