Type 2 diabetes is a prevalent disease which afflicts over 150 million people worldwide and there is a great medical need for new therapeutic agents to treat it. Inhibition of protein tyrosine phosphatase 1B (PTP1B) has emerged as a highly validated, attractive approach for the treatment of not only type 2 diabetes but also obesity. Discovery of small-molecule inhibitors has been pursued extensively in both academia and industry and a number of very potent and selective inhibitors have been identified. With X-ray crystallography, the binding modes of several classes of inhibitors have been elucidated. This has resulted in significant progress in understanding important interactions between inhibitors and specific residues of PTP1B, which could help the design of future inhibitors. However, since the active site of PTP1B that most of these inhibitors bind to is highly hydrophilic, it remains a challenge to identify inhibitors with both excellent in vitro potency and drug-like physiochemical properties, which would lead to significant in vivo activities.