Dendritic cells (DCs) developmentally regulate their capacity for antigen presentation by controlling the transport and surface expression of MHC class II molecules. These events reflect a developmental regulation of invariant (Ii) chain cleavage, most likely by the cysteine protease cathepsin S. In immature DCs, inefficient Ii chain cleavage due to low cathepsin S activity leads to the transport of class II-Ii chain complexes to lysosomes, while in mature DCs, elevated cathepsin S activity results in efficient delivery of class II αβ dimers to the plasma membrane. Cathepsin S is not controlled transcriptionally but by a novel mechanism involving alterations in the expression and localization of an endogenous cathepsin S inhibitor cystatin C. Thus, the ratio of cystatin C to cathepsin S in developing DCs helps to determine the fate of newly synthesized MHC class II molecules.