The functional significance of B7 co-stimulation in T-cell activation was described first in the context of preventing the induction of anergy. The functions of this pathway are far more complex than initially appreciated in view of the existence of two B7 molecules which have specificities for both CD28 and CTLA-4, which serve to amplify and terminate T-cell responses respectively. Mice lacking B7 co-stimulators and CD28 and CTLA-4 co-stimulatory receptors are helping to clarify the functions of this key immunoregulatory pathway. In this review we will focus on the role of B7 co-stimulation in the activation and differentiation of CD4+ helper cells and CD8+ cytotoxic cells. The contribution of B7 co-stimulation to CD4+ responses depends upon the activation history of the T-cell and the strength of the T-cell antigen receptor signal. B7 co-stimulation contributes to interleukin (IL)-2 production by both naive and previously activated CD4+ T cells. B7 co-stimulation is most critical for the differentiation of naive CD4+ T cells to IL-4 producers, but predominately influences IL-2 production by previously activated CD4+ cells. B7 co-stimulation is important in development of cytotoxic T cells through both effects on T-helper cells and by direct co-stimulation of CD8+ cells.