The small GTPase Rac1 is involved in regulating membrane ruffling, gene transcription, cell-cycle progression and cell transformation, and some of these events are blocked by inhibitors of phosphoinositide 3-kinase (PI 3-kinase). Moreover, Rac1 can be activated by several guanine nucleotide exchange factors, which facilitate the release of GDP. We therefore investigated the ability of PI 3-kinase lipid products to regulate Tiam1, a Rac1-specific exchange factor. Tiam1 bound to polyphosphorylated inositol lipids in the rank order PtdIns(3,4,5)P(3)>PtdIns(3,4)P(2) >>PtdIns(4,5)P(2), and this binding could be attributed to the N-terminal pleckstrin-homology (N-PH) domain. Both PtdIns(3,4,5)P(3) and PtdIns(3,4)P(2) enhanced Tiam1 guanine nucleotide exchange activity in vitro, but PtdIns(4,5)P(2) had no effect. Co-expression of a constitutively active PI 3-kinase with Tiam1 increased the amount of GTP-bound Rac1 in vivo, a response which required the N-PH domain of Tiam1. Ectopic expression of Tiam1 caused membrane ruffling in Swiss 3T3 cells that was characterized by wortmannin-sensitive and -insensitive components, which required the N-PH domain and the C-terminal PH domain of Tiam1 respectively. These results reveal novel facets of Tiam1-dependent regulation of Rac1 function.