Ligand-receptor interactions can generate the production of hydrogen peroxide (H₂O₂) in cells, the implications of which are becoming appreciated. Fluctuations in H₂O₂ levels can affect the intracellular activity of key signaling components including protein kinases and protein phosphatases. Rhee et al. discuss recent findings on the role of H₂O₂ in signal transduction. Specifically, H₂O₂ appears to oxidize active site cysteines in phosphatases, thereby inactivating them. H₂O₂ also can activate protein kinases; however, although the mechanism of activation for some kinases appears to be similar to that of phosphatase inactivation (cysteine oxidation), it is unclear how H₂O₂ promotes increased activation of other kinases. Thus, the higher levels of intracellular phosphoproteins observed in cells most likely occur because of the concomitant inhibition of protein phosphatases and activation of protein kinases.