Small Rho GTPases are well known to regulate a variety of cellular processes by acting as molecular switches. The regulatory function of Rho GTPases is critically dependent on their posttranslational modification at the carboxyl terminus by isoprenylation and association with proper cellular membranes. Despite numerous studies, the mechanisms of recycling and functional integration of Rho GTPases at the biological membranes are largely unclear. In this study, prenylated human Rac1, a prominent member of the Rho family, was purified in large amount from baculovirus-infected Spodoptera frugiperda insect cells using a systematic detergent screening. In contrast to non-prenylated human Rac1 purified from Escherichia coli, prenylated Rac1 from insect cells was able to associate with synthetic liposomes and to bind Rho-specific guanine nucleotide dissociation inhibitor 1 (GDI1). Subsequent liposome reconstitution experiments revealed that GDI1 efficiently extracts Rac1 from liposomes preferentially in the inactive GDP-bound state. The extraction was prevented when Rac1 was activated to its GTP-bound state by Rac-specific guanine nucleotide exchange factors (GEFs), such as Vav2, Dbl, Tiam1, P-Rex1 and TrioN, and bound by the downstream effector Pak1. We found that dissociation of Rac1-GDP from its complex with GDI1 strongly correlated with two distinct activities of especially Dbl and Tiam1, including liposome association and the GDP/GTP exchange. Taken together, our results provided first detailed insights into the advantages of the in vitro liposome-based reconstitution system to study both the integration of the signal transducing protein complexes and the mechanisms of regulation and signaling of small GTPases at biological membranes.