A successful immune response requires intercellular contact between T and B lymphocytes. We recently showed that CD28, a T cell surface protein that regulates an activation pathway, could mediate intercellular adhesion with activated B cells by interaction with the B7 antigen. Here we show that CD28 is the primary receptor for B7 on activated peripheral blood T cells, that CD28 binds to B7 in the absence of other accessory molecules, and that interaction between CD28 and B7 is costimulatory for T cell activation. To characterize the binding of CD28 to B7, we have produced genetic fusions of the extracellular portions of B7 and CD28, and immunoglobulin (Ig) C gamma 1 chains. 125I-labeled B7 Ig bound to CD28-transfected Chinese hamster ovary (CHO) cells, and to immobilized CD28 Ig with a Kd approximately 200 nM. B7 Ig also inhibited CD28-mediated cellular adhesion. The function of CD28-B7 interactions during T cell activation was investigated with soluble fusion proteins and with B7-transfected CHO cells. Immobilized B7 Ig and B7+ CHO cells costimulated T cell proliferation. Stimulation of T cells with B7+ CHO cells also specifically increased levels of interleukin 2 transcripts. These results demonstrate that the CD28 signaling pathway could be activated by B7, resulting in increased T cell cytokine production and T cell proliferation. Cellular interactions mediated by B7 and CD28 may represent an important component of the functional interactions between T and B lymphoid cells.