Insulin resistance in the liver and peripheral tissues, together with a pancreatic cell defect, are the common causes of Type 2 diabetes. It is now appreciated that insulin resistance can result from a defect in the insulin receptor signaling system, at a site post binding of insulin to its receptor. Protein tyrosine phosphatases (PTPases) have been shown to be negative regulators of the insulin receptor. Inhibition of PTPases may be an effective method in the treatment of Type 2 diabetes. We have identified two novel series of benzofuran/benzothiophene biphenyl oxo-acetic acids and sulfonyl-salicylic acids as potent inhibitors of PTP1B with good oral antihyperglycemic activity. To assist in the design of these inhibitors, crystallographic studies have attempted to identify enzyme inhibitor interactions. Resolution of crystal complexes has suggested that the inhibitors bind to the enzyme active site and are held in place through hydrogen bonding and van der Waals interactions formed within two hydrophobic pockets. In the oxo-acetic acid series, hydrophobic substitutents at position-2 of the benzofuran/benzothiophene biphenyl framework interacted with Phe182 of the catalytic site and were very critical to the intrinsic activity of the molecule. The hydrophobic region of the catalytic-site pocket was exploited and taken advantage by hydrophobic substituents at either the alpha-carbon or the ortho aromatic positions of the oxo-acetic acid moiety. Similar ortho aromatic substitutions on the salicylic acid-type inhibitors had no effect, primarily due to the different orientation of these inhibitors in the catalytic site. The most active inhibitors of both series inhibited recombinant human PTP1B with phosphotyrosyl dodecapeptide TRDI(P)YETD(P)Y(P)YRK as the source of the substrate with IC(50) values in the range of 20-50 nM. Compound 68 was one of the most active compounds in vivo, normalizing plasma glucose levels at the 25 mg/kg dose (po) and the 1 mg/kg dose (ip). Compound 68 was also selective against several other PTPases.