Hepatocyte growth factor activator inhibitors (HAI)-1 and -2 are recently identified and closely related Kunitz-type transmembrane serine protease inhibitors. Whereas HAI-1 is well established as an inhibitor of the serine proteases matriptase and hepatocyte growth factor activator, the physiological targets of HAI-2 are unknown. Here we show that HAI-2 displays potent inhibitory activity toward matriptase, forms SDS-stable complexes with the serine protease, and blocks matriptase-dependent activation of its candidate physiological substrates proprostasin and cell surface-bound pro-urokinase plasminogen activator. To further explore the potential functional relationship between HAI-2 and matriptase, we generated a transgenic mouse strain with a promoterless beta-galactosidase marker gene inserted into the endogenous locus encoding HAI-2 protein and performed a global high resolution mapping of the expression of HAI-2, matriptase, and HAI-1 proteins in all adult tissues. This analysis showed striking co-localization of HAI-2 with matriptase and HAI-1 in epithelial cells of all major organ systems, thus strongly supporting a role of HAI-2 as a physiological regulator of matriptase activity, possibly acting in a redundant or partially redundant manner with HAI-1. Unlike HAI-1 and matriptase, however, HAI-2 expression was also detected in non-epithelial cells of brain and lymph nodes, suggesting that HAI-2 may also be involved in inhibition of serine proteases other than matriptase.