The classic cadherins are a group of calcium dependent, homophilic cell–cell adhesion molecules that drive morphogenetic rearrangements and maintain the integrity of cell groups through the formation of adherens junctions. The formation and maintenance of cadherin-mediated adhesions is a multistep process and mechanisms have evolved to regulate each step. This suggests that functional state switching plays an important role in development. Among the many challenges ahead is to determine the developmental role that functional state switching plays in tissue morphogenesis and to define the roles of each of the several regulatory interactions that participate in switching. One correlate of the loss of cadherin-mediated adhesion, the “turn-off” of cadherin function, is the exit, or “drop-out” of cells from neural and epithelial layers and their conversion to a motile phenotype. We suggest that epithelial mesenchymal conversions may be initiated by signaling pathways that result in the loss of cadherin function. Tyrosine phosphorylation of β-catenin is one such mechanism. Enhanced phosphorylation of tyrosine residues on β-catenin is almost invariably associated with loss of the cadherin-actin connection concomitant with loss of adhesive function. There are several tyrosine kinases and phosphatases that have been shown to have the potential to alter the phosphorylation state of β-catenin and thus the function of cadherins. Our laboratory has focused on the role of the nonreceptor tyrosine phosphatase PTP1B in regulating the phosphorylation of β-catenin on tyrosine residues. Our data suggest that PTP1B is crucial for maintenance of N-cadherin-mediated adhesions in embryonic neural retina cells. By using an L-cell model system constitutively expressing N-cadherin, we have worked out many of the molecular interactions essential for this regulatory interaction. Extracellular cues that bias this critical regulatory interaction toward increased phosphorylation of β-catenin may be a critical component of many developmental events. © 2002 Wiley-Liss, Inc.