We have generated transgenic nonobese diabetic (NOD) mice expressing dominant negative mutant IFN-gamma receptors on pancreatic beta cells to investigate whether the direct effects of IFN-gamma on beta cells contribute to autoimmune diabetes. We have also quantitated by flow cytometry the rise in class I MHC on beta cells of NOD mice with increasing age and degree of islet inflammatory infiltrate. Class I MHC expression increases gradually with age in wild-type NOD mice; however, no such increase is observed in the transgenic beta cells. The transgenic mice develop diabetes at a similar rate to that of wild-type animals. This study dissociates class I MHC upregulation from progression to diabetes, shows that the rise in class I MHC is due to local IFN-gamma action, and eliminates beta cells as the targets of IFN-gamma in autoimmune diabetes.