The insulin receptor-mediated signal transduction pathway involves insulin receptor substrate 1 and a variety of proteins containing Src homology-2 (SH2) domains, such as phosphatidylinositol 3-kinase, Grb2, and protein-tyrosine phosphatase 1D (PTP1D). Upon insulin stimulation of baby hamster kidney cells overexpressing the IR, the catalytically inactive mutant of PTP1D, C463A, becomes tyrosine-phosphorylated and coprecipitates with Grb2. Tyrosine phosphorylation of this mutant is significantly reduced when wild type PTP1D is coexpressed. Substitution of tyrosine residues 546 and 584 with phenylalanine abrogates tyrosine phosphorylation of the catalytically inactive mutant and abolishes its interaction with Grb2.