Dbl family proteins act as guanine nucleotide exchange factors and positive regulators of Rho GTPase function by stimulating formation of the active, GTP-bound state. All Dbl family Rho guanine nucleotide exchange factors possess an invariant tandem domain structure consisting of a Dbl homology (DH) catalytic domain followed by a pleckstrin homology (PH) regulatory domain. We determined previously that the PH domain of Dbs was critical for the intrinsic catalytic activity of the DH domain in vitro and for Dbs transformation in vivo. In this study, we evaluated the role of phosphoinositide binding to the PH domain in regulating the DH domain function of Dbs in vitro and in vivo. We determined that mutation of basic amino acids located within the beta1-beta2 and beta3-beta4 loops of the PH domain resulted in impaired phospholipid binding in vitro, yet full guanine nucleotide exchange activity in vitro was retained for RhoA and Cdc42. Surprisingly, these mutants were compromised in their ability to activate Rho GTPases in vivo and to cause transformation of NIH 3T3 cells. However, Dbs subcellular localization was impaired by these PH domain mutations, supporting a role for phospholipid interactions in facilitating membrane association. Despite the importance of phospholipid binding for Dbs function in vivo, we found that Dbs signaling and transforming activity was not stimulated by phosphatidylinositol 3-kinase activation. We suggest that the PH domain of Dbs facilitates two distinct roles in the regulation of DH domain function, one critical for GTPase association and activation in vitro and one critical for phosphoinositide binding and GTPase interaction in vivo, that together promote Dbs association with membranes.