A wide variety of membrane transformations important in intracellular transport are inhibited by the fungal metabolite brefeldin A (refs 1-4), implying that the target for this drug is central to the formation and maintenance of subcellular compartments. Brefeldin A added to cells causes the rapid and reversible dissociation of a Golgi-associated peripheral membrane protein (M(r) 110,000) which was found to be identical to one of the subunits of the coat of Golgi-derived (non-clathrin) coated vesicles, beta-COP, implying that brefeldin A prevents transport by blocking the assembly of coats and thus the budding of enclosed vesicles. In addition to the coatomer (a cytosol-derived complex of seven polypeptide chains, one of which is beta-COP), the non-clathrin (COP) coat of Golgi-derived vesicles contains stoichiometric amounts of a small (M(r) approximately 20,000) GTP-binding protein, the ADP-ribosylation factor (ARF). Binding of ARF to Golgi membranes is necessary before coatomer/beta-COP can bind these membranes (ref. 12; and D. J. Palmer et al., manuscript submitted), so the primary effect of brefeldin A seems to be on the reaction responsible for ARF binding. Indeed, like beta-COP, ARF is dissociated from the Golgi complex by treatment with brefeldin A and brefeldin A prevents ARF from associating in vitro, but the mechanism of this action by brefeldin A has been unclear. Here we report the discovery of an enzyme in a Golgi-enriched fraction that catalyses guanine nucleotide (GDP-GTP) exchange on ARF-1 protein, and which is inhibited by brefeldin A. We suggest that activation of ARF proteins for membrane localization by compartmentalized exchange enzymes is in general the first committed step in membrane transformation pathways.