Rho GTPases regulate a diverse range of processes that are dependent on their proper cellular localization. The membrane localization of these GTPases is due in large part to their carboxyl-terminal geranylgeranyl moiety. In addition, most of the Rho family members contain a cluster of positively charged residues (i.e. a "polybasic domain"), directly preceding their geranylgeranyl moiety, and it has been suggested that this domain serves to fine-tune their localization among different cellular membrane sites. Here, we have taken a closer look at the role of the polybasic domain of Cdc42 in its ability to bind to membranes and induce the transformation of fibroblasts. A FRET assay for the binding of Cdc42 to liposomes of defined composition showed that Cdc42 associates more strongly with liposomes containing phosphatidylinositol 4,5-bisphosphate (PIP(2)) when compared either with uncharged control membranes or with liposomes containing a charge-equivalent amount of phosphatidylserine. The carboxyl-terminal di-arginine motif (Arg-186 and Arg-187) was shown to play an essential role in the binding of Cdc42 to PIP(2)-containing membranes. We further showed that substitutions for the di-arginine motif, when introduced within a constitutively active ("fast cycling") Cdc42(F28L) background, had little effect on the ability of the activated Cdc42 mutant to induce microspikes/filopodia in NIH 3T3 cells, whereas they eliminated its ability to transform fibroblasts. Taken together, these findings suggest that the di-arginine motif within the carboxyl terminus of Cdc42 is necessary for this GTPase to bind at membrane sites containing PIP(2), where it can initiate signaling activities that are essential for the oncogenic transformation of cells.