Classical cadherins mediate cell recognition and cohesion in many tissues of the body. It is increasingly apparent that dynamic cadherin contacts play key roles during morphogenesis and that a range of cell signals are activated as cells form contacts with one another. It has been difficult, however, to determine whether these signals represent direct downstream consequences of cadherin ligation or are juxtacrine signals that are activated when cadherin adhesion brings cell surfaces together but are not direct downstream targets of cadherin signaling. In this study, we used a functional cadherin ligand (hE/Fc) to directly test whether E-cadherin ligation regulates phosphatidylinositol 3-kinase (PI 3-kinase) and Rac signaling. We report that homophilic cadherin ligation recruits Rac to nascent adhesive contacts and specifically stimulates Rac signaling. Adhesion to hE/Fc also recruits PI 3-kinase to the cadherin complex, leading to the production of phosphatidylinositol 3,4,5-trisphosphate in nascent cadherin contacts. Rac activation involved an early phase, which was PI 3-kinase-independent, and a later amplification phase, which was inhibited by wortmannin. PI 3-kinase and Rac activity were necessary for productive adhesive contacts to form following initial homophilic ligation. We conclude that E-cadherin is a cellular receptor that is activated upon homophilic ligation to signal through PI 3-kinase and Rac. We propose that a key function of these cadherin-activated signals is to control adhesive contacts, probably via regulation of the actin cytoskeleton, which ultimately serves to mediate adhesive cellcell recognition.