Epithelial cell migration and morphogenesis require dynamic remodeling of the actin cytoskeleton and cell-cell adhesion complexes. Numerous studies in cell culture and in model organisms have demonstrated the small GTPase Rac to be a critical regulator of these processes; however, little is known about Rac function in the morphogenic movements that drive epithelial tube formation. Here, we use the embryonic salivary glands of Drosophila to understand the role of Rac in epithelial tube morphogenesis. We show that inhibition of Rac function, either through loss of function mutations or dominant-negative mutations, disrupts salivary gland invagination and posterior migration. In contrast, constitutive activation of Rac induces motile behavior and subsequent cell death. We further show that Rac regulation of salivary gland morphogenesis occurs through modulation of cell-cell adhesion mediated by the E-cadherin/beta-catenin complex and that shibire, the Drosophila homolog of dynamin, functions downstream of Rac in regulating beta-catenin localization during gland morphogenesis. Our results demonstrate that regulation of cadherin-based adherens junctions by Rac is critical for salivary gland morphogenesis and that this regulation occurs through dynamin-mediated endocytosis.