The cdc25 protein is a highly specific tyrosine phosphatase that triggers mitosis by dephosphorylating the cdc2 protein kinase. Using Xenopus extracts, we have found that the cdc25 protein is active at a low level throughout interphase. Near the onset of mitosis, the cdc25 protein undergoes a marked elevation in phosphatase activity that coincides with an extensive phosphorylation of the protein in its N-terminal region. In vitro dephosphorylation of this hyperphosphorylated form of cdc25 reduces its phosphatase activity back to the interphase level. Moreover, treatment of interphase Xenopus extracts with okadaic acid, a phosphatase inhibitor that accelerates the entry into mitosis, elicits both the premature hyperphosphorylation of cdc25 and the stimulation of its cdc2-specific tyrosine phosphatase activity. These experiments demonstrate the existence of a cdc25 regulatory system consisting of both a stimulatory kinase that phosphorylates a putative regulatory domain of the cdc25 protein and an inhibitory serine/threonine phosphatase that counteracts this kinase activity.