Cell adhesion is critical to the establishment of proper connections in the nervous system. Some receptor-type protein tyrosine phosphatases (RPTPs) have adhesion molecule-like extracellular segments with intracellular tyrosine phosphatase domains that may transduce signals in response to adhesion. PTPmu is a RPTP that mediates cell aggregation and is expressed at high levels in the nervous system. In this study, we demonstrate that PTPmu promotes neurite outgrowth of retinal ganglion cells when used as a culture substrate. In addition, PTPmu was found in a complex with N-cadherin in retinal cells. To determine the physiological significance of the association between PTPmu and N-cadherin, the expression level and enzymatic activity of PTPmu were perturbed in retinal explant cultures. Downregulation of PTPmu expression through antisense techniques resulted in a significant decrease in neurite outgrowth on an N-cadherin substrate, whereas there was no effect on laminin or L1-dependent neurite outgrowth. The overexpression of a catalytically inactive form of PTPmu significantly decreased neurite outgrowth on N-cadherin. These data indicate that PTPmu specifically regulates signals required for neurites to extend on an N-cadherin substrate, implicating reversible tyrosine phosphorylation in the control of N-cadherin function. Together, these results suggest that PTPmu plays a dual role in the regulation of neurite outgrowth.