We have a 4 month old shepard lab mix and have been feeding her dry puppy food. Someone told us that we should add water to the food because they have rolling stomachs.
Is this true?

It makes no difference if you add water or the dog eats dry food and then drinks water. It all ends up in the same place. I have never heard of this disorder.

I believe you are referring to bloat. Bloat in Dogs (http://www.globalspan.net/bloat.htm)
Here's a study on it
Canine Bloat - Tufts Breeding & Genetics 2003 (http://www.vin.com/proceedings/Proceedings.plx?CID=TUFTSBG2003&PID=5091&O=Generic)

Note: not every thinks that this study is accurate.

Yes, I think they are referring to bloat (or to be scientific, canine gastric dilitation-volvulus syndrome, or GDV.)
The only reason I could come across for wetting the food first would be that the dry food would soak up all the water before the dog ate it. If he ate it dry he might consume more, which would expand to an even greater volume in the stomach. This in turn could lead to bloat and/or a potentially fatal twisting of the stomach.
Probably the best advice I can offer you right now is to feed the dog small amounts frequently (divide his total daily food allotment printed on the dog food bag) and don't let him exercise strenuously for an hour after eating. If you ever notice his stomach getting progressively larger in a very short period, this is an emergency and get him to a vet immediately.
This does not mean the dog will get bloat, just that he has the breeding and body type that predisposes him to GDV.

Keep feeding dry. Shepherds may actually chew it enough to help clean their teeth. Switch to adult chow now. It slows growth and helps the joints.