Understanding the function of protein tyrosine phosphatases (PTPs) is crucial to deciphering cellular signaling in higher organisms. Of the 100 putative PTPs in human genome, only a little is known about their precise biological functions. Thus establishing novel ways to study PTP function remains a top priority among researchers. Classical genetics and more recently the use of RNA interference (RNAi) for gene silencing remains a popular choice to study function. However, the one gene-one function hypothesis is now recognized as an oversimplified scenario, especially among the signaling proteins such as PTPs. Therefore, there is a need to understand gene function in an appropriate cellular context. Since proteins are the work horses of the cell, alteration of protein function by various means is a particularly attractive strategy. In this context, the chemical approach, where a small molecule is used to affect the function of the desired protein is increasingly being recognized as a method of choice. In this review, we describe how small molecules can be used to study the function of a prototypical PTP, PTP1B, which is a negative regulator in insulin signaling. This includes our initial strategies for finding the most potent and specific PTP1B inhibitor to date, synthesizing cell permeable analogues suitable for cellular studies, and using them to dissect the role of PTP1B in the insulin signaling pathway. This approach is potentially general and thus could be utilized to study the function of other PTPs.