We report the first intracellular characterization of an endogenous nontransmembrane protein tyrosine phosphatase (PTP). Using affinity-purified polyclonal antibodies, we have identified PTP-1B as a 50 kd serine phosphoprotein in immunoprecipitation and immunoblotting assays. Surprisingly, indirect immunofluorescence experiments indicate that PTP-18 is localized predominantly in the endoplasmic reticulum (ER). Subcellular fractionation is consistent with this localization and establishes that PTP-1B is tightly associated with microsomal membranes, with its phosphatase domain oriented towards the cytoplasm. The C-terminal 35 amino acids of PTP-1 B are both necessary and sufficient for targeting to the ER. The finding of a tyrosine phosphatase on the ER suggests new possibilities for cellular events controlled by tyrosine phosphorylation.