Most transmembrane, receptor-like protein-tyrosine phosphatases (RPTPs) contain two cytoplasmic catalytic protein-tyrosine phosphatase (PTP) domains, of which the membrane-proximal domain, D1, contains the majority of the activity, while the membrane-distal domain, D2, exhibits little or no activity. We have investigated the structural basis for reduced activity in RPTP-D2s, using RPTPalpha as a model system. Sequence alignment of PTP domains indicated that two motifs, the KNRY motif and the WpD motif, are highly conserved in all PTP domains, but not in RPTP-D2s. In RPTPalpha-D2, the Tyr in the KNRY motif is substituted by Val (position 555) and the Asp in the WpD motif by Glu (position 690). Mutation of Val555 and Glu690 had synergistic effects on RPTPalpha-D2 activity, in that the PTP activity of RPTPalpha-D2-V555Y/E690D was greatly enhanced to levels that were similar to or approaching those of RPTPalpha-D1. Therefore, Val555 and Glu690 are responsible in large part for reduced RPTPalpha-D2 activity. In addition, we established that the increased PTP activity is due to restoration of effective transition-state stabilization in RPTPalpha-D2-V555Y/E690D. Since the KNRY motif and the WpD motif are mutated in all RPTP-D2s, it is highly unlikely, due to lack of transition-state stabilization, that the residual RPTP-D2 catalytic activity plays a role in the function of RPTPs.