Herein we present the design, synthesis, and biological evaluation of potent and highly selective β‐secretase 2 (memapsin 1, beta‐site amyloid precursor protein cleaving enzyme 2, or BACE 2) inhibitors. BACE2 has been recognized as an exciting new target for type 2 diabetes. The X‐ray structure of BACE1 bound to inhibitor 2 a {N3‐[(1S,2R)‐1‐benzyl‐2‐hydroxy‐3‐[[(1S,2S)‐2‐hydroxy‐1‐(isobutylcarbamoyl)propyl]amino]propyl]‐5‐[methyl(methylsulfonyl)amino]‐N1‐[(1R)‐1‐phenylpropyl]benzene‐1,3‐dicarboxamide} containing a hydroxyethylamine isostere was determined. Based on this structure, a computational docking study was performed which led to inhibitor 2 a‐bound BACE2 models. These were used to optimize the potency and selectivity of inhibitors. A systematic structure–activity relationship study led to the identification of determinants of the inhibitors’ potency and selectivity toward the BACE2 enzyme. Inhibitors 2 d [N3‐[(1S,2R)‐1‐benzyl‐2‐hydroxy‐3‐[[(1S,2S)‐2‐hydroxy‐1‐(isobutylcarbamoyl)pentyl]amino]propyl]‐N1‐methyl‐N1‐[(1R)‐1‐phenylpropyl]benzene‐1,3‐dicarboxamide; Ki=0.031 nm, selectivity over BACE1: ≈174 000‐fold] and 3 l [N1‐((2S,3R)‐3‐hydroxy‐1‐phenyl‐4‐((3‐(trifluoromethyl)benzyl)amino)butan‐2‐yl)‐N3,5‐dimethyl‐N3‐((R)‐1‐phenylethyl)isophthalamide; Ki=1.6 nm, selectivity over BACE1: >500‐fold] displayed outstanding potency and selectivity. Inhibitor 3 l is nonpeptide in nature and may pave the way to the development of a new class of potent and selective BACE2 inhibitors with clinical potential.