The tumor suppressor protein PTEN is mutated in glioblastoma multiform brain tumors, resulting in deregulated signaling through the phosphoinositide 3-kinase (PI3K)-protein kinase B (PKB) pathway, which is critical for maintaining proliferation and survival. We have examined the relative roles of the two major phospholipid products of PI3K activity, phosphatidylinositol 3,4-biphosphate [PtdIns(3,4)P2] and phosphatidylinositol 3,4,5-triphosphate [PtdIns(3,4,5)P3], in the regulation of PKB activity in glioblastoma cells containing high levels of both of these lipids due to defective PTEN expression. Reexpression of PTEN or treatment with the PI3K inhibitor LY294002 abolished the levels of both PtdIns(3, 4)P2 and PtdIns(3,4,5)P3, reduced phosphorylation of PKB on Thr308 and Ser473, and inhibited PKB activity. Overexpression of SHIP-2 abolished the levels of PtdIns(3,4,5)P3, whereas PtdIns(3,4)P2 levels remained high. However, PKB phosphorylation and activity were reduced to the same extent as they were with PTEN expression. PTEN and SHIP-2 also significantly decreased the amount of PKB associated with cell membranes. Reduction of SHIP-2 levels using antisense oligonucleotides increased PKB activity. SHIP-2 became tyrosine phosphorylated following stimulation by growth factors, but this did not significantly alter its phosphatase activity or ability to antagonize PKB activation. Finally we found that SHIP-2, like PTEN, caused a potent cell cycle arrest in G(1) in glioblastoma cells, which is associated with an increase in the stability of expression of the cell cycle inhibitor p27(KIP1). Our results suggest that SHIP-2 plays a negative role in regulating the PI3K-PKB pathway.