Recent studies have implicated proteasomes in the generation of the antigenic peptides that are presented on major histocompatibility complex class I molecules to T lymphocytes. Interferon gamma modifies the subunit composition of proteasomes and causes changes in their peptidase activities that should favor the production of peptides with hydrophobic or basic carboxyl termini (i.e., the types found on major histocompatibility complex class I molecules). It has been proposed that these changes in peptidase activity are due to incorporation into proteasomes of the major histocompatibility complex-encoded subunits LMP2 and -7, which are induced by interferon gamma. Here we show by gene transfection into lymphoblasts or HeLa cells that LMP7 increases the capacity (Vmax) of 20S and 26S proteasomes to cleave peptides after hydrophobic and basic residues without affecting hydrolysis after acidic residues. These changes depended on the amount of LMP7 subunits incorporated into proteasomes. Transfection of LMP2 reduced cleavage of peptides after acidic residues, increased hydrolysis after basic residues, and did not affect the hydrophobic activity. Since the activity of the total proteasome population changed after incorporation of only small amounts of LMP2 or -7, these subunits must cause major alterations in peptidase activity. Thus, their expression can account for the changes in proteasome activity induced by inteferon gamma, and these findings lend further support to the proposed roles of LMPs in altering the nature of the peptides generated for antigen presentation.