The Rab GTPases function as specific regulators of membrane transport. The GTP/GDP cycle is believed to control shuttling of Rab proteins between the cytosol and organelle membranes. In vitro, Rab proteins are removed from membranes by a protein that inhibits GDP dissociation (rabGDI), which leads to formation of a cytosolic complex of Rab with the inhibitor protein. Here we use a purified Rab5-rabGDI complex in a permeabilized cell system to investigate how the cytosolic complexed form of Rab reassociates with the membrane. We find that exogenous Rab5 is correctly targeted and induces the formation of enlarged early endosomes, demonstrating that it is functionally active. Binding of Rab5 to the acceptor membrane is accompanied by release of the rabGDI protein into the cytosol. A transient GDP-Rab5 intermediate was detected which was subsequently converted into the GTP-bound form. Our results indicate that there is a multistep mechanism for the insertion of Rab5 into the membrane which is mediated by a guanine-nucleotide-exchange factor.