Previous biochemical evidence has yielded conflicting models for the role of protein tyrosine phosphatase-1B (PTP-1B) in the regulation of integrin signaling. Thus, to establish the physiological relevance for such a role, we employed a genetic approach by generating embryonic fibroblasts from PTP-1B knockout mice. Both primary fibroblasts and their derived cell lines were used in this study. Immortalization of wild-type primary cells with the SV40 Large T antigen resulted in a dramatic increase in the endogenous expression of PTP-1B, suggesting a role during transformation. Moreover, the absence of PTP-1B in the transformed cell lines led to a more pronounced effect on different pathways of fibronectin-mediated signaling compared with the untransformed state. Specifically, p130(Cas) phosphorylation, Erk activation as well as cell spreading were delayed in PTP-1B-deficient cells, compared with their wild-type counterparts. Interestingly, this attenuation in integrin-mediated events closely resembles that of Src-deficient fibroblasts. Indeed, PTP-1B deficient, transformed fibroblasts held in suspension do exhibit a hyperphosphorylation of the inhibitory site (Tyr-527) of Src, compared with their wild-type counterparts. These results establish PTP-1B as a positive physiological regulator of integrin signaling in transformed cells, acting upstream of Src Tyr-527 dephosphorylation that leads to several adhesion-dependent events.