A variety of cell types expressing MHC class II molecules is known to function as APC in vitro. We employed the Ig kappa gene enhancer and promoter to target the class II E alpha gene, and thereby I-E, exclusively to B cells to address their APC function in vivo. Although transgenic I-E was expressed on B lymphocytes, we unexpectedly obtained I-E on thymic medullary epithelium but not macrophages and at low frequency on dendritic cells. Using these transgenic mice, we constructed bone marrow irradiation chimeras with I-E expressed only on medullary epithelium, in order to determine the role of this cell type in tolerance by clonal deletion in the thymus. Although it is accepted that bm-derived cells play a primary role in deletion, and thymic epithelium can delete clones to a lesser degree, the role of cortical vs medullary thymic epithelium has not been directly dissected. We demonstrate that medullary epithelium alone can tolerize by partial deletion of I-E-reactive V beta 5+ T cells. These results indicate a role for medullary epithelium in deletion during the later stages of thymic development, and support the notion that positive and negative selection of developing T cells can occur in distinct temporal and anatomic compartments.