Protein-tyrosine phosphatases (PTPs) are important for the control of proper cellular tyrosine phosphorylation. Despite the large number of PTPs encoded in the human genome and the emerging roles played by PTPs in human diseases, a detailed understanding of the role played by PTPs in normal physiology and in pathogenic conditions has been hampered by the absence of PTP-specific inhibitors. Such inhibitors could serve as useful tools for determining the physiological functions of PTPs and may constitute valuable therapeutics in the treatment of several human diseases. However, because of the highly conserved nature of the active site, it has been difficult to develop selective PTP inhibitors. By taking an approach to tether together two small ligands that can interact simultaneously with the active site and a unique proximal noncatalytic site, we have recently acquired Compound 2 (see Fig. 1), the most potent and selective PTP1B inhibitor identified to date, which exhibits several orders of magnitude selectivity in favor of PTP1B against a panel of PTPs. We describe an evaluation of the interaction between 2 and its analogs with PTP1B and its site-directed mutants selected based on hydrogen/deuterium exchange of PTP1B backbone amides in the presence and absence of 2. We have established the binding mode of Compound 2 and identified 12 PTP1B residues that are important for the potency and selectivity of Compound 2. Although many of the residues important for Compound 2 binding are not unique to PTP1B, the combinations of all contact residues differ between PTP isozymes, which suggest that the binding surface defined by these residues in individual PTPs determines inhibitor selectivity. Our results provide structural information toward understanding of the molecular basis for potent and selective PTP1B inhibition and further establish the feasibility of acquiring potent, yet highly selective, PTP inhibitory agents.