The structure of the SHP-2 tyrosine phosphatase, determined at 2.0 Å resolution, shows how its catalytic activity is regulated by its two SH2 domains. In the absence of a tyrosine-phosphorylated binding partner, the N-terminal SH2 domain binds the phosphatase domain and directly blocks its active site. This interaction alters the structure of the N-SH2 domain, disrupting its phosphopeptide-binding cleft. Conversely, interaction of the N-SH2 domain with phosphopeptide disrupts its phosphatase recognition surface. Thus, the N-SH2 domain is a conformational switch; it either binds and inhibits the phosphatase, or it binds phosphoproteins and activates the enzyme. Recognition of bisphosphorylated ligands by the tandem SH2 domains is an integral element of this switch; the C-terminal SH2 domain contributes binding energy and specificity, but it does not have a direct role in activation.