Accurate phosphorylation of tyrosine residues in proteins plays a central role in regulation of cellular function. Although connections between aberrant tyrosine kinase activity and malignancy are well-established, significantly less is known about the roles of protein tyrosine phosphatases (PTPases) in tumorigenesis. We have previously shown that the transmembranal form of PTPase Epsilon (PTPepsilon) is upregulated in mouse mammary tumors initiated specifically by ras or neu, suggesting that PTPepsilon may play a role in transformation by these two oncogenes. In order to test this notion in vivo, we created transgenic mice that express elevated levels of PTPepsilon in their mammary epithelium by use of the MMTV promoter/enhancer. Following several cycles of pregnancy female MMTV-PTPepsilon mice uniformly developed pronounced and persistent mammary hyperplasia which was accompanied by residual milk production. Solitary mammary tumors were often detected secondary to mammary hyperplasia. The sporadic nature of the tumors, the long latency period prior to their development, and low levels of transgene expression in the tumors indicate that PTPepsilon provides a necessary, but insufficient, signal for oncogenesis. The results provide genetic evidence that PTPepsilon plays an accessory role in production of mammary tumors in a manner consistent with its upregulation in mammary tumors induced by ras or neu.