Small GTPases of the Rho family play key roles in the formation of neuronal axons and dendrites by transducing signals from guidance cues, such as neurotrophins, to the actin cytoskeleton. However, there is little insight into the mechanism by which neurotrophins regulate Rho GTPases. Here, we show the crucial role of the ubiquitous Rac1-specific guanine nucleotide exchange factor, Tiam1 (T lymphoma invasion and metastasis 1), in transducing a neurotrophin-mediated change in cell shape. We demonstrate that BDNF, acting through TrkB, directly binds and specifically activates Tiam1 by phosphorylating Tyr-829, leading to Rac1 activation and lamellipodia formation in Cos-7 cells and increased neurite outgrowth from cortical neurons. A point mutation in Tiam1, Tyr-829 to Phe-829, blocked these BDNF-induced changes in cellular morphology. The findings are evidence of a previously uncharacterized mechanism for the activation of Tiam1 and of a role for this effector in neurotrophin-mediated signal transduction leading to changes in cellular morphology.