We have previously demonstrated that splenic B cells, transduced with peptide-IgG fusion proteins, are efficient tolerogenic APCs in vivo. Specific hyporesponsiveness to epitopes encoded in the peptide-IgG fusion protein has been achieved to over one dozen Ags, and clinical efficacy has been established in animal models for several autoimmune diseases and hemophilia. Previous studies also demonstrated that tolerance in this system requires MHC class II expression by the transduced B cells. Yet, the mechanisms of this B cell tolerogenic processing pathway remain unclear. In this study, we show that MHC class II molecules on tolerogenic B cells present epitopes derived from endogenous, but not exogenous (secreted), peptide-IgG fusion protein. These class II epitopes from the IgG fusion protein are processed in lysosomes/endosomes in an IFN-gamma-inducible lysosomal thiol reductase-dependent manner. We suggest that the MHC class II presentation of endogenously produced fusion protein epitopes represents a novel mechanism for tolerance induced by peptide-IgG-transduced B cells. An understanding of this process might provide insights into central and peripheral tolerance induced by other professional and nonprofessional APCs.