The size of the peripheral T lymphocyte pool remains relatively constant throughout adult life, but individual populations undergo expansion and contraction upon antigen encounter due to signals delivered by members of the B7-CD28 family of costimulatory molecules. This family includes receptors on T cells that can provide either activating or inhibitory signals. In general, activation occurs in response to pathogens, when lymphocyte expansion and acquisition of effector functions is appropriate. Conversely inhibitory receptors provide down-modulating signals that help terminate immune responses and maintain self-tolerance. The activating receptor CD28 engages the same B7-1 and B7-2 molecules as the inhibitory receptor cytotoxic T lymphocyte antigen 4 (CTLA-4), although with reduced affinity than CTLA-4. In addition to this direct competitive mechanism, CTLA-4 can directly inhibit T cell receptor (TCR) signals independently of CD28 expression and recent findings indicate that CTLA-4 may also operate through reverse signaling on ligand-expressing cells. Fusion proteins between the extracellular domain of CTLA-4 and an immunoglobulin Fc portion have been created that have potent immunosuppressive properties in animal models of transplantation and autoimmunity and that show great promise in clinical trials. Like CTLA-4, CTLA-Ig, is thought to selectively prevent activation of CD28 by interacting with B7-1 and B7-2. In addition, CTLA-4-Ig can bind to B7 molecules expressed on dendritic cells and activate a pathway of tryptophan catabolism that can lead to indirect inhibition of lymphocyte activation and T cell death. In this review, we will focus on the current knowledge of the mechanisms of action of CTLA-4 and CTLA-4-Ig.