Protein farnesyltransferase (FTase) catalyses the attachment of a farnesyl lipid group to numerous essential signal transduction proteins, including members of the Ras superfamily. The farnesylation of Ras oncoproteins, which are associated with 30% of human cancers, is essential for their transforming activity. FTase inhibitors are currently in clinical trials for the treatment of cancer. Here we present a complete series of structures representing the major steps along the reaction coordinate of this enzyme. From these observations can be deduced the determinants of substrate specificity and an unusual mechanism in which product release requires binding of substrate, analogous to classically processive enzymes. A structural model for the transition state consistent with previous mechanistic studies was also constructed. The processive nature of the reaction suggests the structural basis for the successive addition of two prenyl groups to Rab proteins by the homologous enzyme geranylgeranyltransferase type-II. Finally, known FTase inhibitors seem to differ in their mechanism of inhibiting the enzyme.