Signaling mechanisms involving protein tyrosine phosphatases govern several cellular and developmental processes. These enzymes are regulated by several mechanisms which include variation in the catalytic turnover rate based on redox stimuli, subcellular localization or protein-protein interactions. In the case of Receptor Protein Tyrosine Phosphatases (RPTPs) containing two PTP domains, phosphatase activity is localized in their membrane-proximal (D1) domains, while the membrane-distal (D2) domain is believed to play a modulatory role. Here we report our analysis of the influence of the D2 domain on the catalytic activity and substrate specificity of the D1 domain using two Drosophila melanogaster RPTPs as a model system. Biochemical studies reveal contrasting roles for the D2 domain of Drosophila Leukocyte antigen Related (DLAR) and Protein Tyrosine Phosphatase on Drosophila chromosome band 99A (PTP99A). While D2 lowers the catalytic activity of the D1 domain in DLAR, the D2 domain of PTP99A leads to an increase in the catalytic activity of its D1 domain. Substrate specificity, on the other hand, is cumulative, whereby the individual specificities of the D1 and D2 domains contribute to the substrate specificity of these two-domain enzymes. Molecular dynamics simulations on structural models of DLAR and PTP99A reveal a conformational rationale for the experimental observations. These studies reveal that concerted structural changes mediate inter-domain communication resulting in either inhibitory or activating effects of the membrane distal PTP domain on the catalytic activity of the membrane proximal PTP domain.