Rac1 is a member of the Rho family of small GTPases, which control signaling pathways that regulate actin cytoskeletal dynamics and gene transcription. Rac1 is activated by guanine nucleotide exchange factors and inactivated by GTPase-activating proteins. In addition, Rho-GDP dissociation inhibitors (Rho-GDIs) can inhibit Rac1 by sequestering it in the cytoplasm. We have found previously that colorectal tumors express an alternatively spliced variant, Rac1b, containing 19 additional amino acids following the switch II region. Here we characterized the regulation and downstream signaling of Rac1b. Although little Rac1b protein is expressed in cells, the amount of activated Rac1b protein often exceeds that of activated Rac1, suggesting that Rac1b contributes significantly to the downstream signaling of Rac in cells. The regulation of both Rac1 and Rac1b activities is dependent on guanine nucleotide exchange factors and GTPase-activating proteins, but the difference in their activation is mainly determined by the inability of Rac1b to interact with Rho-GDI. As a consequence, most Rac1b remains bound to the plasma membrane and is not sequestered by Rho-GDI in the cytoplasm. Unlike Rac1, activated Rac1b is unable to induce lamellipodia formation and is unable to bind and activate p21-activated protein kinase nor activate the downstream protein kinase JNK. However, both Rac1 and Rac1b are able to activate NFkappaB to the same extent. These data suggest that alternative splicing of Rac1 leads to a highly active Rac variant that differs in regulation and downstream signaling.