Ras GTPases were long thought to function exclusively from the plasma membrane (PM). However, a current model suggests that Ras proteins can compartmentalize to regulate different functions, and an oncogenic H-Ras mutant that is restricted to the endomembrane can still transform cells. In this study, we demonstrated that cells transformed by endomembrane-restricted oncogenic H-Ras formed tumors in nude mice. To define downstream targets of endomembrane Ras pathways, we analyzed Cdc42, which concentrates in the endomembrane and has been shown to act downstream of Ras in Schizosaccharomyces pombe. Our data show that cell transformation induced by endomembrane-restricted oncogenic H-Ras was blocked when Cdc42 activity was inhibited. Moreover, H-Ras formed a complex with Cdc42 on the endomembrane, and this interaction was enhanced when H-Ras was GTP bound or when cells were stimulated by growth factors. H-Ras binding evidently induced Cdc42 activation by recruiting and/or activating Cdc42 exchange factors. In contrast, when constitutively active H-Ras was restricted to the PM by fusing to a PM localization signal from the Rit GTPase, the resulting protein did not detectably activate Cdc42 although it activated Raf-1 and efficiently induced hallmarks of Ras-induced senescence in human BJ foreskin fibroblasts. Surprisingly, PM-restricted oncogenic Ras when expressed alone could only weakly transform NIH 3T3 cells; however, when constitutively active Cdc42 was coexpressed, together they transformed cells much more efficiently than either one alone. These data suggest that efficient cell transformation requires Ras proteins to interact with Cdc42 on the endomembrane and that in order for a given Ras protein to fully transform cells, multiple compartment-specific Ras pathways need to work cooperatively.