There is now considerable experimental evidence that aberrant activation of Rho family small GTPases promotes the uncontrolled proliferation, invasion, and metastatic properties of human cancer cells. Therefore, there is considerable interest in the development of small molecule inhibitors of Rho GTPase function. However, to date, most efforts have focused on inhibitors that indirectly block Rho GTPase function, by targeting either enzymes involved in post-translational processing or downstream protein kinase effectors. We recently determined that the EHT 1864 small molecule can inhibit Rac function in vivo. In this study, we evaluated the biological and biochemical specificities and biochemical mechanism of action of EHT 1864. We determined that EHT 1864 specifically inhibited Rac1-dependent platelet-derived growth factor-induced lamellipodia formation. Furthermore, our biochemical analyses with recombinant Rac proteins found that EHT 1864 possesses high affinity binding to Rac1, as well as the related Rac1b, Rac2, and Rac3 isoforms, and this association promoted the loss of bound nucleotide, inhibiting both guanine nucleotide association and Tiam1 Rac guanine nucleotide exchange factor-stimulated exchange factor activity in vitro. EHT 1864 therefore places Rac in an inert and inactive state, preventing its engagement with downstream effectors. Finally, we evaluated the ability of EHT 1864 to block Rac-dependent growth transformation, and we determined that EHT 1864 potently blocked transformation caused by constitutively activated Rac1, as well as Rac-dependent transformation caused by Tiam1 or Ras. Taken together, our results suggest that EHT 1864 selectively inhibits Rac downstream signaling and transformation by a novel mechanism involving guanine nucleotide displacement.