Phosphatases and kinases are the cellular signal transduction enzymes that control protein phosphorylation. PRL phosphatases constitute a novel class of small (20 kDa), prenylated phosphatases with oncogenic activity. In particular, PRL-3 is consistently overexpressed in liver metastasis in colorectal cancer cells and represents a new therapeutic target. Here, we present the solution structure of PRL-3, the first structure of a PRL phosphatase. The structure places PRL phosphatases in the class of dual specificity phosphatases with closest structural homology to the VHR phosphatase. The structure, coupled with kinetic studies of site-directed mutants, identifies functionally important residues and reveals unique features, differentiating PRLs from other phosphatases. These differences include an unusually hydrophobic active site without the catalytically important serine/threonine found in most other phosphatases. The position of the general acid loop indicates the presence of conformational change upon catalysis. The studies also identify a potential regulatory role of Cys(49) that forms an intramolecular disulfide bond with the catalytic Cys(104) even under mildly reducing conditions. Molecular modeling of the highly homologous PRL-1 and PRL-2 phosphatases revealed unique surface elements that are potentially important for specificity.