Costimulatory molecules B7 and B7-2 interact with T cell surface receptors CD28/CTLA4 and deliver a costimulatory signal essential for T cell growth. However, the structure basis of this interaction is not known. B7 and B7-2 are members of immunoglobulin (Ig) superfamily and their extracellular portion consists of an IgV- and IgC-like domain. Here we report that a naturally occurring, alternatively spliced form of B7 reveals that exon 3-encoded IgC domain is essential for CD28/CTLA4 binding. Mutational analysis of B7 demonstrates a critical role of several amino acids around loops between strands B and C and D and E, for binding CTLA4/CD28. These amino acids are clustered to form a single binding site centered at 201Y. A comparison of the effects of mutations on the binding of CD28 and CTLA4 reveals that CD28 and CTLA4 binds to the same site on B7. These results have important implications on the role of CTLA4 and CD28 in T cell costimulation. The structure of the CD28/CTLA4-binding site also provides valuable information for immune intervention targeted at the B7/B7-2-CD28/CTLA4 interactions.