The crystal structure of the protein tyrosine phosphatase SHP-2 reveals the mechanism of auto-inhibition of phosphatase activity by its SH2 domains, Phosphotyrosine peptide stimulation of the phosphatase activity, resulting from peptide binding to the N-terminal SH2 domain, is linked to conformational changes within the protein, including an unprecedented allosteric transition of the N-terminal SH2 domain.