Myeloid-derived suppressor cells (MDSCs) promote tumor progression. The mechanisms of MDSC development during tumor growth remain unknown. Tumor exosomes (T-exosomes) have been implicated to play a role in immune regulation, however the role of exosomes in the induction of MDSCs is unclear. Our previous work demonstrated that exosomes isolated from tumor cells are taken up by bone marrow myeloid cells. Here, we extend those findings showing that exosomes isolated from T-exosomes switch the differentiation pathway of these myeloid cells to the MDSC pathway (CD11b+Gr-1+). The resulting cells exhibit MDSC phenotypic and functional characteristics including promotion of tumor growth. Furthermore, we demonstrated that in vivo MDSC mediated promotion of tumor progression is dependent on T-exosome prostaglandin E2 (PGE2) and TGF-β molecules. T-exosomes can induce the accumulation of MDSCs expressing Cox2, IL-6, VEGF, and arginase-1. Antibodies against exosomal PGE2 and TGF-β block the activity of these exosomes on MDSC induction and therefore attenuate MDSC-mediated tumor-promoting ability. Exosomal PGE2 and TGF-β are enriched in T-exosomes when compared with exosomes isolated from the supernatants of cultured tumor cells (C-exosomes). The tumor microenvironment has an effect on the potency of T-exosome mediated induction of MDSCs by regulating the sorting and the amount of exosomal PGE2 and TGF-β available. Together, these findings lend themselves to developing specific targetable therapeutic strategies to reduce or eliminate MDSC-induced immunosuppression and hence enhance host antitumor immunotherapy efficacy. © 2008 Wiley-Liss, Inc.