T cell activation and function are critically regulated by positive and negative costimulatory molecules. Aberrant expression and function of costimulatory molecules have been associated with persistent activation of self-reactive T cells in autoimmune diseases such as rheumatoid arthritis (RA). In this study, initial analysis of costimulatory molecules led to the unexpected observation that, in addition to CD80, several negative regulators (e.g., CTLA-4, programmed death-1 (PD-1), and PD ligand-1) were overexpressed in synovial T cells and macrophages derived from RA patients as opposed to controls. The expression of CD80 and PD ligand-1 on monocytes could be induced in vitro by IFN-gamma and TNF-alpha that were produced abundantly in RA-derived synovial fluid (SF). Furthermore, the soluble form of negative costimulatory molecules occurred at high concentrations in sera and SF of RA patients and correlated with titers of rheumatoid factor in RA patients. In particular, the levels of soluble PD-1 were found to correlate significantly with those of TNF-alpha in SF derived from RA patients. Detailed characterization of soluble PD-1 revealed that it corresponded to an alternative splice variant (PD-1Deltaex3) and could functionally block the regulatory effect of membrane-bound PD-1 on T cell activation. Our data indicate a novel pathogenic pathway in which overexpression of negative costimulatory molecules to restrict synovial inflammation in RA is overruled by the excessive production of soluble costimulatory molecules.