Increased incidence of type 2 diabetes mellitus and obesity has elevated the medical need for new agents to treat these disease states. Resistance to the hormones insulin and leptin are hallmarks of both type 2 diabetes and obesity. Drugs that can ameliorate this resistance should be effective in treating type 2 diabetes and possibly obesity. Protein tyrosine phosphatase 1B (PTP1B) is thought to function as a negative regulator of insulin and leptin signal transduction. This article reviews PTP1B as a novel target for type 2 diabetes, and looks at the challenges in developing small-molecule inhibitors of this phosphatase.