Oncogenic EGFRvIII is a naturally occurring oncoprotein and is expressed in about 40-50% of human glioblastomas, particularly those that arise de novo. To understand the molecular mechanisms by which this oncoprotein alters transforming phenotypes, and since our previous work indicated that SHP-2 protein tyrosine phosphatase activity modulated EGFRvIII activation and downstream signaling, we examined whether SHP-2 plays a role in EGFRvIII-induced oncogenesis by using both PTEN-deficient U87MG.EGFRvIII and PTEN-intact LN229.EGFRvIII cells. Inhibition of SHP-2 expression by Shp-2 siRNA inhibited cell growth, transformation and altered morphology of these EGFRvIII transformed GBM cells. Ectopic expression of a PTPase-inactive form of SHP-2, SHP-2 C459S, but not its wild-type SHP-2 or either of two SH2 domain mutants, abrogated transformation of EGFRvIII-expressing glioblastomas in soft agar and in nude mice. SHP-2 C459S cells grew slower and exhibited a more flattened morphology with more organized actin stress fibers under both full growth and low serum conditions. Furthermore, shp-2+/- and -/- mouse embryonic fibroblasts (MEFs) could not be transformed by EGFRvIII while shp-2+/+ MEFs displayed a fully transformed phenotype upon introduction of EGFRvIII, again indicating a requirement for functional SHP-2 in EGFRvIII transformation. Moreover, the SHP-2 PTPase activity inhibitor NSC-87877 inhibited endogenous SHP-2 activity, Erk phosphorylation and transformation in both GBM cell lines. EGFRvIII expression recruited SHP-2 to the receptor complex to transduce signals and also increased SHP-2 phosphorylation at Tyr542. Inhibition of EGFRvIII-induced cell growth and transformation by SHP-2 C459S or shp-2 siRNA was mediated by its ability to block cell cycle progression at different phases in these GBM cells. These data indicate that differential activation of SHP-2 phosphorylation at Tyr542 in these two GBM cell lines likely results in increased different PTPase activity and distinct mechanisms of cell cycle progression and SHP-2, in particular its PTPase activity, plays a critical role in EGFRvIII-mediated transformation.