IGF-I stimulates smooth muscle cell (SMC) migration and the phosphatidylinositol-3 (PI-3) kinase pathway plays an important role in mediating the IGF-I-induced migratory response. Prior studies have shown that the tyrosine phosphatase Src homology 2 domain tyrosine phosphatase (SHP)-2 is necessary to activate PI-3 kinase in response to growth factors and expression of a phosphatase inactive form of SHP-2 (SHP-2/C459S) impairs IGF-I-stimulated cell migration. However, the mechanism by which SHP-2 phosphatase activity or the recruitment of SHP-2 to other signaling molecules contributes to IGF-I stimulated PI-3 kinase activation has not been determined. SMCs that had stable expression of SHP-2/C459S had reduced cell migration and Akt activation in response to IGF-I, compared with SMC-expressing native SHP-2. Similarly in cells expressing native SHP-2, IGF-I induced SHP-2 binding to p85, whereas in cells expressing SHP-2/C459S, there was no increase. Because the C459S substitution results in loss of the ability of SHP-2 to disassociate from its substrates, making it inaccessible not only to p85 but also the other proteins, a p85 mutant in which tyrosines 528 and 556 were changed to phenylalanines was prepared to determine whether this would disrupt the p85/SHP-2 interaction and whether the loss of this specific interaction would alter IGF-I stimulated the cell migration. Substitution for these tyrosines in p85 resulted in loss of SHP-2 recruitment and was associated with a reduction in association of the p85/p110 complex with insulin receptor substrate-1. Cells stably expressing this p85 mutant also showed a decrease in IGF-I-stimulated PI-3 kinase activity and cell migration. Preincubation of cells with a cell-permeable peptide that contains the tyrosine556 motif of p85 also disrupted SHP-2 binding to p85 and inhibited the IGF-I-induced increase in cell migration. The findings indicate that tyrosines 528 and 556 in p85 are required for SHP-2 association. SHP-2 recruitment to p85 is required for IGF-I-stimulated association of the p85/p110 complex with insulin receptor substrate-1 and for the subsequent activation of the PI-3 kinase pathway leading to increased cell migration.