It is now well established that T cells require two signals for activation and effector function. The first signal is provided through the T cell receptor for antigen. The best-characterized pathway which provides the second, or costimulatory, signal is through the CD28 receptor on the surface of T cells. In vitro, ligation of the T cell receptor without a second signal induces a long-lived state of anergy in T cells. CD28 has two known ligands, B7-1 and B7-2, expressed on activated antigen-presenting cells. A soluble fusion protein called CTLA4Ig has been produced which binds B7-1 and B7-2 and acts as a competitive inhibitor of CD28. In vitro and in vivo studies with CTLA4Ig demonstrate that it is an extremely effective immunosuppressive agent in models of transplantation and autoimmunity. Mechanistic studies indicate that CTLA4Ig may work by partially inhibiting the expansion of antigen-reactive cells and inducing anergy in the residual population.