The B7 family member programmed death ligand 2 (PD-L2) has been implicated in both positive and negative regulation of T cell activity. In this study, we demonstrate that on human T cells, PD-L2 acts only as a negative regulator of T cell activity, inhibiting proliferation, IL-2 production, and IFN-gamma production via its interaction with programmed death-1 (PD-1). This study also shows a novel role for PD-1 in inhibiting beta1 and beta2 integrin-mediated adhesion. PD-L2 inhibition of T cell function involves modulation of the phosphoinositide 3-OH kinase (PI 3-K)/AKT and extracellular signal-related kinase (ERK)/mitogen-activated protein kinase (MAPK) pathways, with PD-L2 inhibiting anti-CD3-induced AKT phosphorylation within minutes and ERK phosphorylation after hours. Analysis of phosphatase activity of Src homology 2 domain-containing tyrosine phosphatase (SHP)-1 and SHP-2 in response to anti-CD3 mAb or anti-CD3 mAb + PD-L2 stimulation revealed that while SHP-1 phosphatase activity is not affected by stimulation, SHP-2 phosphatase activity is significantly increased by anti-CD3 mAb + PD-L2 stimulation. Anti-CD3 mAb + PD-L2 stimulation also increased the level of SHP-2 associated with the PD-1 receptor. These results suggest that catalytically active SHP-2 associated with the PD-1 receptor is involved in modulating T cell function.