Most receptor-like, transmembrane protein tyrosine phosphatases (PTPases), such as CD45 and the leukocyte common antigen-related (LAR) molecule, have two tandemly repeated PTPase domains in the cytoplasmic segment. The role of each PTPase domain in mediating PTPase activity remains unclear; however, it has been proposed that PTPase activity is associated with only the first of the two domains, PTPase domain 1, and the membrane-distal PTPase domain 2, which has no catalytic activity, would regulate substrate specificity. In this paper, we examine the function of each PTPase domain of LAR in vivo using a potential physiological substrate, namely insulin receptor, and LAR mutant proteins in which the conserved cysteine residue was changed to a serine residue in the active site of either or both PTPase domains. LAR associated with and preferentially dephosphorylated the insulin receptor that was tyrosine phosphorylated by insulin stimulation. Its association was mediated by PTPase domain 2, because the mutation of Cys-1813 to Ser in domain 2 resulted in weakening of the association. The Cys-1522 to Ser mutant protein, which is defective in the LAR PTPase domain 1 catalytic site, was tightly associated with tyrosine-phosphorylated insulin receptor, but failed to dephosphorylate it, indicating that LAR PTPase domain 1 is critical for dephosphorylation of tyrosine-phosphorylated insulin receptor. This hypothesis was further confirmed by using LAR mutants in which either PTPase domain 1 or domain 2 was deleted. Moreover, the association of the extracellular domains of both LAR and insulin receptor was supported by using the LAR mutant protein without the two PTPase domains. LAR was phosphorylated by insulin receptor tyrosine kinase and autodephosphorylated by the catalytic activity of the PTPase domain 1. These results indicate that each domain of LAR plays distinct functional roles through phosphorylation and dephosphorylation in vivo.