Protein tyrosine phosphatase-1b (Ptp1b) inhibits insulin and leptin signaling by dephosphorylating specific tyrosine residues in their activated receptor complexes. Insulin signals are mediated by tyrosine phosphorylation of the insulin receptor and its downstream targets, such as Irs1 and Irs2. Irs2 plays an especially important role in glucose homeostasis because it mediates some peripheral actions of insulin and promotes pancreatic beta-cell function. To determine whether the deletion of Ptp1b compensates for the absence of Irs2, we analyzed mice deficient in both Ptp1b and Irs2. Pancreatic beta-cell area decreased in Ptp1b(-/-) mice, consistent with decreased insulin requirements owing to increased peripheral insulin sensitivity. By contrast, peripheral insulin sensitivity and beta-cell area increased in Irs2(-/-)::Ptp1b(-/-) mice, which improved glucose tolerance in Irs2(-/-)::Ptp1b(-/-) mice and delayed diabetes until 3 months of age. However, beta-cell function eventually failed to compensate for absence of Irs2. Our studies demonstrate a novel role for Ptp1b in regulating beta-cell homeostasis and indicate that Ptp1b deficiency can partially compensate for lack of Irs2.