The effect of B7-mediated costimulation on T cell homeostasis was examined in studies of B7-1 (CD80) and B7-2 (CD86) transgenic as well as B7-deficient mice. B7 overexpression in transgenic mice resulted in marked polyclonal peripheral T cell hyperplasia accompanied by skewing toward an increased proportion of CD8 single-positive cells and a decreased proportion of CD4 single-positive cells in thymus and more markedly in peripheral T cells. B7-induced T cell expansion was dependent on both CD28 and TCR expression. Transgenic overexpression of B7-1 or B7-2 resulted in down-regulation of cell surface CD28 on thymocytes and peripheral T cells through a mechanism mediated by intercellular interaction. Mice deficient in B7-1 and B7-2 exhibited changes that were the reciprocal of those observed in B7-overexpressing transgenics: a marked increase in the CD4/CD8 ratio in peripheral T cells and an increase in cell surface CD28 in thymus and peripheral T cells. These reciprocal effects of genetically engineered increase or decrease in B7 expression indicate that B7 costimulation plays a physiological role in the regulation of CD4+ and CD8+ T cell homeostasis.