Pancreatic beta-cells and gamma-aminobutyric acid (GABA)-secreting neurons both express the enzyme glutamic acid decarboxylase (GAD) which is a major target of autoantibodies associated with beta-cell destruction and impairment of GABA-ergic neurotransmitter pathways. The predominant form of GAD in pancreatic beta-cells, GAD65, is synthesized as a soluble hydrophilic molecule, which is modified to become firmly membrane anchored. Here we show by immunogold electron microscopy that GAD65 is localized to the membrane of small vesicles which are identical in size to small synaptic-like microvesicles in pancreatic beta-cells. The NH2-terminal domain of GAD65 is the site of a two-step modification, the last of which results in a firm membrane anchoring that involves posttranslational hydroxylamine sensitive palmitoylation. GAD65 can be released from the membrane by an apparent enzyme activity in islets, suggesting that the membrane anchoring step is reversible and potentially regulated. The hydrophobic modifications and consequent membrane anchoring of GAD65 to microvesicles that store its product GABA may be of functional importance and, moreover, significant for its selective role as an autoantigen.