Several protein-tyrosine phosphatases (PTPs) have been proposed to act as negative regulators of insulin signaling. Recent studies have shown increased insulin sensitivity and resistance to obesity in PTP1B knockout mice, thus pointing to this enzyme as a potential drug target in diabetes. Structure-based design, guided by PTP mutants and x-ray protein crystallography, was used to optimize a relatively weak, nonphosphorus, nonpeptide general PTP inhibitor (2-(oxalyl-amino)-benzoic acid) into a highly selective PTP1B inhibitor. This was achieved by addressing residue 48 as a selectivity determining residue. By introducing a basic nitrogen in the core structure of the inhibitor, a salt bridge was formed to Asp-48 in PTP1B. In contrast, the basic nitrogen causes repulsion in other PTPs containing an asparagine in the equivalent position resulting in a remarkable selectivity for PTP1B. Importantly, this was accomplished while retaining the molecular weight of the inhibitor below 300 g/mol.