Two protein forms of tyrosine phosphatase epsilon (PTPepsilon) are known - receptor-like (tm-PTPepsilon) and non receptor-like (cyt-PTPepsilon), with each form possessing unique tissue-specific expression patterns, subcellular localization, and physiological functions. We describe two additional forms of PTPepsilon protein - p67 and p65. p67 is produced by initiation of translation at an internal initiation codon of PTPepsilon mRNA molecules, while p65 is produced by specific proteolytic cleavage of larger PTPepsilon proteins. Cleavage is inhibited by MG132, but is proteasome-independent. In contrast with full-length tm-PTPepsilon and cyt-PTPepsilon, p67 and p65 are exclusively cytoplasmic, are not phosphorylated by Neu, and do not associate with Grb2 in unstimulated cells. p67 and p65 are catalytically active and can reduce Src-mediated phosphorylation of the Kv2.1 voltage-gated potassium channel, albeit with reduced efficiency which most likely results from their cytoplasmic localization. We also show that full-length cyt-PTPepsilon protein can be found at the cell membrane and in the nucleus and that it is the first 27 residues of cyt-PTPepsilon which determine this localization. p67 and p65 provide mechanisms for removing PTPepsilon activity from the cell membrane, possibly serving to down-regulate PTPepsilon activity there. PTPepsilon emerges as a family of four related proteins whose expression, subcellular localization and most likely physiological roles are subject to complex regulation at the transcriptional, translational and post-translational levels.