SH2 domain-containing 5-inositol phosphatase (SHIP2) is implicated in the development of type 2 diabetes and cancer. Tyrosine phosphorylation of SHIP2 is shown to enhance its phosphatase activity. Using IP4 as a substrate, we show here that tyrosines 986, 987, and 1135 are critical for EGF-induced stimulation of SHIP2 activity. SHIP2 with a disrupted SH2 domain (R47G mutation) displays higher constitutive activity than wild-type SHIP2. Deletion of the C-terminus region similarly activates SHIP2. Thus, the SH2 domain of SHIP2, in conjunction with the C-terminus, confers an inhibitory effect to maintain a low basal activity, and signal-induced tyrosine phosphorylations overcome this effect to activate SHIP2.