Protein tyrosine phosphorylation is regulated by both protein tyrosine kinases and protein tyrosine phosphatases (PTPases). Recently, the structures of a family of PTPases have been described. In order to study the structure-function relationships of receptor-linked PTPases, we analyzed the effects of deletion and point mutations within the cytoplasmic region of the receptor-linked PTPases, LCA and LAR. We show that the first of the two domains has enzyme activity by itself, and that one cysteine residue in the first domain of both LCA and LAR is absolutely required for activity. The second PTPase like domains do not have detectable catalytic activity using a variety of substrates, but sequences within the second domains influence substrate specificity. The functional significance of a stretch of 10 highly conserved amino acid residues surrounding the critical cysteine residue located in the first domain of LAR was assessed. At most positions, any substitution severely reduced enzyme activity, while missense mutations at the other positions tested could be tolerated to varying degrees depending on the amino acid substitution. It is suggested that this stretch of amino acids may be part of the catalytic center of PTPases.