The Drosophila gene mushroom bodies tiny (mbt) encodes a putative p21-activated kinase (PAK), a family of proteins that has been implicated in a multitude of cellular processes including regulation of the cytoskeleton, cell polarisation, control of MAPK signalling cascades and apoptosis. The mutant phenotype of mbt is characterised by fewer neurones in the brain and the eye, indicating a role of the protein in cell proliferation, differentiation or survival. We show that mutations in mbt interfere with photoreceptor cell morphogenesis. Mbt specifically localises at adherens junctions of the developing photoreceptor cells. A structure-function analysis of the Mbt protein in vitro and in vivo revealed that the Mbt kinase domain and the GTPase binding domain, which specifically interacts with GTP-loaded Cdc42, are important for Mbt function. Besides regulation of kinase activity, another important function of Cdc42 is to recruit Mbt to adherens junctions. We propose a role for Mbt as a downstream effector of Cdc42 in photoreceptor cell morphogenesis.