We have previously demonstrated that the inhibitory effects of IL-10 on ConA-induced T cell proliferation or IL-2 production by resting murine T cells were only observed when macrophages, but not when activated B cells, dendritic cells, or L cells, were used as accessory cells. To further elucidate the mechanism of action of IL-10 on the inhibition of macrophage costimulatory activity, we have used a system in which macrophages can develop into effective costimulator cells and the effect of IL-10 on this process can be studied in the absence of T cells. After fixation, resting macrophages have no costimulatory activity for soluble anti-CD3-induced T cell proliferation nor do they express the activation Ag B7/BB1. In contrast, macrophages activated by culture alone, or by culture with IFN gamma or LPS for 24 h, and then fixed, were effective accessory cells, expressed B7, and their costimulatory activity correlated with their level of cell surface B7 expression. Addition of IL-10 during the process of macrophage activation resulted in both a marked reduction in costimulatory activity and in B7 expression. IL-4 and transforming growth factor-beta that suppress many macrophage functions did not inhibit the induction of B7 expression. The inhibitory effect of IL-10 on the up-regulation of B7 was selective because the up-regulation of intercellular adhesion molecule-1 and MHC class II Ag was not affected. Direct evidence that the lack of B7 is the relevant limiting defect for IL-10-treated macrophage accessory cell function was obtained from studies in which the costimulatory capacity of IL-10-treated macrophages could be completely restored by the addition of B7 transfected, but not nontransfected, L cells to the assays.