Interleukin-1beta (IL-1beta) mediates destruction of matrix collagens in diverse inflammatory diseases including arthritis, periodontitis, and pulmonary fibrosis by activating fibroblasts, cells that interact with matrix proteins through integrin-based adhesions. In vitro, IL-1beta signaling is modulated by focal adhesions, supramolecular protein complexes that are enriched with tyrosine kinases and phosphatases. We assessed the importance of tyrosine phosphatases in regulating cell-matrix interactions and IL-1beta signaling. In human gingival fibroblasts plated on fibronectin, IL-1beta enhanced the maturation of focal adhesions as defined by morphology and enrichment with paxillin and alpha-actinin. IL-1beta also induced activation of ERK and recruitment of phospho-ERK to focal complexes/adhesions. Treatment with the potent tyrosine phosphatase inhibitor pervanadate, in the absence of IL-1beta, recapitulated many of these responses indicating the importance of tyrosine phosphatases. Immunoblotting of collagen bead-associated complexes revealed that the tyrosine phosphatase, SHP-2, was also enriched in focal complexes/adhesions. Depletion of SHP-2 by siRNA or by homologous recombination markedly altered IL-1beta-induced ERK activation and maturation of focal adhesions. IL-1beta-induced tyrosine phosphorylation of SHP-2 on residue Y542 promoted focal adhesion maturation. Association of Gab1 with SHP-2 in focal adhesions correlated temporally with activation of ERK and was abrogated in cells expressing mutant (Y542F) SHP-2. We conclude that IL-1beta mediated maturation of focal adhesions is dependent on tyrosine phosphorylation of SHP-2 at Y542, leading to recruitment of Gab1, a process that may influence the downstream activation of ERK.