Posttranslational modification of Pas protein has been shown to be critical for interaction with its effector molecules, including Saccharomyces cerevisiae adenylyl cyclase. However, the mechanism of its action was unknown. In this study, we used a reconstituted system with purified adenylyl cyclase and Pas proteins carrying various degrees of the modification to show that the posttranslational modification, especially the farnesylation step, is responsible for 5- to 10-fold increase in Pas-dependent activation of adenylyl cyclase activity even though it has no significant effect on their binding affinity. The stimulatory effect of farnesylation is found to depend on the association of adenylyl cyclase with 70-kDa adenylyl cyclase-associated protein (CAP), which was known to be required for proper in vivo response of adenylyl cyclase to Pas protein, by comparing the levels of Pas-dependent activation of purified adenylyl cyclase with and without bound CAP. The region of CAP required for this effect is mapped to its N-terminal segment of 168 amino acid residues, which coincides with the region required for the in vivo effect. Furthermore, the stimulatory effect is successfully reconstituted by in vitro association of CAP with the purified adenylyl cyclase molecule lacking the bound CAP. These results indicate that the association of adenylyl cyclase with CAP is responsible for the stimulatory effect of posttranslational modification of Pas on its activity and that this may be the mechanism underlying its requirement for the proper in vivo cyclic AMP response.