Catalysis by protein-tyrosine phosphatase 1B (PTP1B) occurs through a two-step mechanism involving a phosphocysteine intermediate. We have solved crystal structures for the transition state analogs for both steps. Together with previously reported crystal structures of apo-PTP1B, the Michaelis complex of an inactive mutant, the phosphoenzyme intermediate, and the product complex, a full picture of all catalytic steps can now be depicted. The transition state analog for the first catalytic step comprises a ternary complex between the catalytic cysteine of PTP1B, vanadate, and the peptide DADEYL, a fragment of a physiological substrate. The equatorial vanadate oxygen atoms bind to the P-loop, and the apical positions are occupied by the peptide tyrosine oxygen and by the PTP1B cysteine sulfur atom. The vanadate assumes a trigonal bipyramidal geometry in both transition state analog structures, with very similar apical O-O distances, denoting similar transition states for both phosphoryl transfer steps. Detailed interactions between the flanking peptide and the enzyme are discussed.