Structure-based design led to the discovery of novel (S)-isothiazolidinone ((S)-IZD) heterocyclic phosphotyrosine (pTyr) mimetics that when incorporated into dipeptides are exceptionally potent, competitive, and reversible inhibitors of protein tyrosine phosphatase 1B (PTP1B). The crystal structure of PTP1B in complex with our most potent inhibitor 12 revealed that the (S)-IZD heterocycle interacts extensively with the phosphate binding loop precisely as designed in silico. Our data provide strong evidence that the (S)-IZD is the most potent pTyr mimetic reported to date.