The p75 neurotrophin receptor (p75NTR) is implicated in diverse cellular events but fundamental aspects of its signaling mechanisms remain unclear. To address this, we have established a novel bioassay to characterize signaling cascades activated by p75NTR. We show that in COS7 cells, p75NTR expression causes a large increase in cell surface area that relies on the activation of Rac1 and we demonstrate that the p75NTR-dependent COS7 phenotype is dependent on ADAM17- and γ-secretase dependent cleavage of p75NTR and generation of the p75NTR intracellular domain (p75NTRICD). We show that the p75NTR adaptor protein NRAGE acts downstream of the p75NTRICD in this cascade and, through a yeast two-hybrid screen, identify NEDD9, a Cas family adaptor protein, as a novel NRAGE binding partner, that mediates p75NTR-dependent Rac1 activation and cell spreading. Our results demonstrate a crucial role for p75NTR cleavage in small GTPase activation and define a novel Rac1 activation pathway involving the p75NTRICD, NRAGE and NEDD9.