Activation of T lymphocytes requires the recognition of peptide-major histocompatibility complexes (MHCs) and costimulatory signals provided by antigen-presenting cells (APCs). It has been shown that T-cell activation without costimulation can lead to anergy. In this study, we developed a novel strategy to inhibit expression of B7 molecules (CD80/86) by transfecting APCs with a gene construct encoding a modified cytotoxic T lymphocyte antigen 4 (CTLA4) molecule (CTLA4-KDEL) that is targeted to the endoplasmic reticulum (ER). APCs expressing this construct failed to express CD80/86 on their surface, were unable to stimulate allogeneic and peptide-specific T-cell responses, and induced antigen-specific anergy of the responding T cells. Cells expressing CTLA4-KDEL do not up-regulate the indoleamine 2, 3-dioxygenase enzyme, unlike cells treated with soluble CTLA4-immunoglobin (Ig). This gene-based strategy to knock out surface receptors is an attractive alternative to using immature dendritic cells for preventing transplant rejection and treating of autoimmune diseases.