Nonobese diabetic (NOD) mice, a model of insulin-dependent diabetes mellitus, have a defect in natural killer (NK) cell-mediated functions. Here we show impairment in an activating receptor, NKG2D, in NOD NK cells. While resting NK cells from C57BL/6 and NOD mice expressed equivalent levels of NKG2D, upon activation NOD NK cells but not C57BL/6 NK cells expressed NKG2D ligands, which resulted in downmodulation of the receptor. NKG2D-dependent cytotoxicity and cytokine production were decreased because of receptor modulation, accounting for the dysfunction. Modulation of NKG2D was mostly dependent on the YxxM motif of DAP10, the NKG2D-associated adaptor that activates phosphoinositide 3 kinase. These results suggest that NK cells may be desensitized by exposure to NKG2D ligands.