Sequence variability in MHC class II molecules plays a major role in genetically determined susceptibility to insulin-dependent diabetes mellitus (IDDM). It is not yet clear whether MHC class II polymorphism allows selective binding of diabetogenic peptides or regulates some key intracellular events associated with class II-restricted Ag presentation. In this study, we have employed gene transfer techniques to analyze the intracellular events that control peptide acquisition by the unique class II molecule expressed by nonobese diabetic mice (I-Ag7). This structurally unique class II molecule fails to demonstrate stable binding to antigenic peptides and fails to undergo the conformational change associated with stable peptide binding to class II molecules. The experiments reported here demonstrate that I-Ag7 can productively associate with two protein cofactors important in class II-restricted Ag presentation, invariant chain (Ii) and DM. DM participates in the removal of the Ii-derived class II-associated Ii chain peptide and the p12 degradation product from the I-Ag7 molecule. In addition, I-Ag7 undergoes a conformational change when DM is expressed within the APC. Finally, DM can mediate accumulation of peptide/class II complexes on the surface of APCs. Collectively, our experiments indicate that the failure of the I-Ag7 molecule to stably bind peptide cannot be attributed to a failure to interact with the DM or Ii glycoproteins.