Binding of the Rac1-specific guanine-nucleotide-exchange factor, Tiam1, to the plasma membrane requires the N-terminal pleckstrin homology domain. In the present study, we show that membrane-association is mediated by binding of PtdIns(4,5)P(2) to the pleckstrin homology domain. Moreover, in 1321N1 astrocytoma cells, translocation of Tiam1 to the cytosol, following receptor-mediated stimulation of PtdIns(4,5)P(2) breakdown, correlates with decreased Rac1-GTP levels, indicating that membrane-association is required for GDP/GTP exchange on Rac1. In addition, we show that platelet-derived growth factor activates Rac1 in vivo by increasing PtdIns(3,4,5)P(3) concentrations, rather than the closely related lipid, PtdIns(3,4)P(2). Finally, the data demonstrate that PtdIns(4,5)P(2) and PtdIns(3,4,5)P(3) bind to the same pleckstrin homology domain in Tiam1 and that soluble inositol phosphates appear to compete with lipids for this binding. Together, these novel observations provide strong evidence that distinct phosphoinositides regulate different functions of this enzyme, indicating that local concentrations of signalling lipids and the levels of cytosolic inositol phosphates will play crucial roles in determining its activity in vivo.