To study the mechanism by which protein tyrosine phosphatases (PTPs) regulate CD3-induced tyrosine phosphorylation, we investigated the distribution of PTPs in subdomains of plasma membrane. We report here that the bulk PTP activity associated with T cell membrane is present outside the lipid rafts, as determined by sucrose density gradient sedimentation. In Jurkat T cells, approximately 5--10% of Src homology 2 domain-containing tyrosine phosphatase (SHP-1) is constitutively associated with plasma membrane, and nearly 50% of SHP-2 is translocated to plasma membrane after vanadate treatment. Similar to transmembrane PTP, CD45, the membrane-associated populations of SHP-1 and SHP-2 are essentially excluded from lipid rafts, where other signaling molecules such as Lck, linker for activation of T cells, and CD3 zeta are enriched. We further demonstrated that CD3-induced tyrosine phosphorylation of these substrates is largely restricted to lipid rafts, unless PTPs are inhibited. It suggests that a restricted partition of PTPs among membrane subdomains may regulate protein tyrosine phosphorylation in T cell membrane. To test this hypothesis, we targeted SHP-1 into lipid rafts by using the N-terminal region of Lck (residues 1--14). The results indicate that the expression of Lck/SHP-1 chimera inside lipid rafts profoundly inhibits CD3-induced tyrosine phosphorylation of CD3 zeta/epsilon, IL-2 generation, and nuclear mobilization of NF-AT. Collectively, these results suggest that the exclusion of PTPs from lipid rafts may be a mechanism that potentiates TCR/CD3 activation.