Grb2-associated binder 1 (Gab1) is a docking protein that is tyrosine phosphorylated following the activation of multiple cytokine receptors and receptor tyrosine kinases. Its function then is to recruit and activate multiple signaling molecules. In our previous work, we showed that Gab1 enhances cell growth and induces the transformed phenotype in NIH3T3 cells downstream of the epidermal growth factor (EGF) receptor. In this report, we analyze how it produces these effects. Because SHP-2 is the major binding partner of Gab1, we mutated its binding site in the Gab1 cDNA (Gab1/DeltaSHP-2). This construct was stably overexpressed in NIH3T3 cells (3T3-Gab1/DeltaSHP-2) and in the wild-type Gab1 cDNA (3T3-Gab1) or an empty expression vector (3T3-CTR). Our findings show that after EGF stimulation, Gab1/DeltaSHP-2 has a higher level of tyrosine phosphorylation at early time points than Gab1. Gab1/DeltaSHP-2 recruits more phosphatidylinositol 3'-kinase than Gab1 after EGF triggering, which accounts for a higher and more sustained AKT activation in 3T3-Gab1/DeltaSHP-2 cells relative to 3T3-Gab1 fibroblasts. Moreover, 3T3-Gab1/DeltaSHP-2 cells demonstrate a higher level of extracellular-regulated kinase 1 activation at early time points of EGF stimulation. However, there was an unexpected decrease in c-fos promoter induction in 3T3-Gab1/DeltaSHP-2 cells when compared with 3T3-Gab1 cells. Additionally, the 3T3-Gab1/DeltaSHP-2 cells show a reversion of the transformed phenotype, including fewer morphologic changes, an increase in stress fiber cytoskeletal organization, and a decrease in cell proliferation and anchorage independent growth. These results reveal that the Gab1/SHP-2 interaction is essential for cell growth and transformation but that this must occur through a novel pathway that is independent of extracellular-regulated kinase or AKT. On the basis of its role in growth and transformation, the Gab1/SHP-2 interaction may become an attractive target for the pharmacologic intervention of malignant cell growth.