In complex with the immunophilin FKBP12, the natural product rapamycin inhibits signal transduction events required for G1 to S phase cell cycle progression in yeast and mammalian cells. Genetic studies in yeast first implicated the TOR1 and TOR2 proteins as targets of the FKBP12‐rapamycin complex. We report here that the TOR2 protein is membrane associated and localized to the surface of the yeast vacuole. Immunoprecipitated TOR2 protein contains readily detectable phosphatidylinositol‐4 (PI‐4) kinase activity attributable to either a TOR2 intrinsic activity or to a PI‐4 kinase tightly associated with TOR2. Importantly, we find that rapamycin stimulates FKBP12 binding to wild‐type TOR2 but not to a rapamycin‐resistant TOR2–1 mutant protein. Surprisingly, FKBP12‐rapamycin binding does not markedly inhibit the PI kinase activity associated with TOR2, but does cause a delocalization of TOR2 from the vacuolar surface, which may deprive the TOR2‐associated PI‐4 kinase activity of its in vivo substrate. Several additional findings indicate that vacuolar localization is important for TOR2 function and, conversely, that TOR2 modulates vacuolar morphology and segregation. These studies demonstrate that TOR2 is an essential, highly conserved component of a signal transduction pathway regulating cell cycle progression conserved from yeast to man.