Negative cosignaling molecules play an important role in regulating T-cell responses to alloantigen stimulation. We recently reported that adenoviral-mediated transduction of islet allografts with B7-H4 inhibits allograft rejection. In this study, we investigate the mechanism for B7-H4-induced prolongation of mouse islet allograft survival. Streptozotocin-induced diabetic C57BL/6 mice were rendered normoglycemic by renal subcapsular implants of B7-H4-transduced BALB/c islets. Grafts and spleens were removed after days 2, 10, and 60 (n = 8 each) for characterization of kinetics of Foxp3 and interleukin 10 (IL-10) expression. Mixed lymphocyte reaction (MLR) was done at day 60. Ten mice were subjected to nephrectomy at 60 days and then five were implanted with secondary BALB/c islets and five were given third-party CBA/J islets. An increase in Foxp3 and IL-10 mRNA expression was detected in recipients' spleens at day 60 and this was associated with increased quantities of Foxp3(+) cells. Splenocytes at day 60 showed hyporesponsiveness during MLR to alloantigen stimulation. Proliferation was partially restored after CD25(+) T-cell depletion. Secondary BALB/c islets survived for 79 ± 29 days compared with 21 ± 3.6 days for CBA/J islets (p < 0.001). Local expression of B7-H4 induces long-term unresponsiveness to donor-specific alloantigens, and is associated with T regulatory cells, suggesting the development of tolerance.