Hepatocyte growth factor activator inhibitor-2 (HAI-2) is an inhibitor of many proteases in vitro, including the membrane-bound serine protease, matriptase. Studies of knock-out mice have shown that HAI-2 is essential for placental development only in mice expressing matriptase, suggesting that HAI-2 is important for regulation of matriptase. Previous studies have shown that recombinant expression of matriptase was unsuccessful unless co-expressed with another HAI, HAI-1. In the present study we show that when human matriptase is recombinantly expressed alone in the canine cell line MDCK, then human matriptase mRNA can be detected and the human matriptase ectodomain is shed to the media, suggesting that matriptase expressed alone is rapidly transported through the secretory pathway and shed. Whereas matriptase expressed together with HAI-1 or HAI-2 accumulates on the plasma membrane where it is activated, as judged by cleavage at Arg614 and increased peptidolytic activity of the cell extracts. Mutagenesis of Kunitz domain 1 but not Kunitz domain 2 abolished this function of HAI-2. HAI-2 seems to carry out its function intracellularly as this is where the vast majority of HAI-2 is located and since HAI-2 could not be detected on the basolateral plasma membrane where matriptase resides. However, minor amounts of HAI-2 not undergoing endocytosis could be detected on the apical plasma membrane. Our results suggest that Kunitz domain 1 of HAI-2 cause matriptase to accumulate in a membrane-bound form on the basolateral plasma membrane.