Programmed death 1 (PD-1) and its ligands, PD-L1 and PD-L2, deliver inhibitory signals that regulate the balance between T cell activation, tolerance, and immunopathology. Immune responses to foreign and self-antigens require specific and balanced responses to clear pathogens and tumors and yet maintain tolerance. Induction and maintenance of T cell tolerance requires PD-1, and its ligand PD-L1 on nonhematopoietic cells can limit effector T cell responses and protect tissues from immune-mediated tissue damage. The PD-1:PD-L pathway also has been usurped by microorganisms and tumors to attenuate antimicrobial or tumor immunity and facilitate chronic infection and tumor survival. The identification of B7-1 as an additional binding partner for PD-L1, together with the discovery of an inhibitory bidirectional interaction between PD-L1 and B7-1, reveals new ways the B7:CD28 family regulates T cell activation and tolerance. In this review, we discuss current understanding of the immunoregulatory functions of PD-1 and its ligands and their therapeutic potential.