The small GTPase Rac regulates cytoskeletal organization, cell cycle progression, gene expression and oncogenic transformation, processes that depend upon both soluble growth factors and adhesion to the extracellular matrix (ECM). We now show that growth factors and adhesion to the ECM both contribute independently and approximately equally to Rac activation. However, activated Rac in non-adherent cells failed to stimulate the Rac effector PAK. V12 Rac or Rac activated by serum translocated to the membrane fraction of adherent cells but remained mainly cytoplasmic in suspended cells. An activated Rac mutant lacking a membrane-targeting sequence did not activate PAK in adherent cells, while mutations that forced membrane targeting restored PAK activation in suspended cells. In vitro, V12 Rac showed greater binding to membranes from adherent relative to suspended cells, indicating that cell adhesion regulated membrane binding sites for Rac. These results show that ECM regulates the ability of Rac to couple with PAK via an effect on membrane binding sites that facilitate their interaction.