Protein tyrosine phosphatases (PTPs) are signaling enzymes that control a diverse array of cellular processes. Malfunction of PTP activity is associated with a number of human disorders. Recent genetic and biochemical studies indicate that PTPs represent a novel platform for drug discovery. Detailed knowledge of PTP substrate specificity and the wealth of structural data on PTPs provide a solid foundation for rational PTP inhibitor design. This review summarizes a correlation of PTP structure and function from mutagenesis experiments. The molecular basis for PTP1B and MKP3 substrate recognition is discussed. A powerful strategy is presented for creating specific and high-affinity bidentate PTP inhibitors that simultaneously bind both the active site and a unique adjacent site. Finally, recent advances in the development of potent and selective inhibitors for PTP1B and Cdc25 are described.