The importance of B7 costimulation in regulating T cell expansion and peripheral tolerance suggests that it may also play a significant regulatory role in the development of autoimmune disease. It is unclear whether B7 costimulation is involved only in the expansion of autoreactive T cells in the periphery, or if it is also required for effector activation of autoreactive T cells in the target organ for mediating tissue injury and propagating autoimmune disease. In this study, the role of B7–CD28 costimulation and the relative importance of B7 costimulators for the induction and effector phases of experimental autoimmune encephalomyelitis (EAE) induced by myelin oligodendrocyte glycoprotein (MOG) peptide were examined. Wild-type, B7-1/B7-2–deficient mice, or CD28-deficient C57BL/6 mice were immunized with MOG 35-55 peptide. Mice lacking both B7-1 and B7-2 or CD28 showed no or minimal clinical signs of EAE and markedly reduced inflammatory infiltrates in the brain and spinal cord. However, mice lacking either B7-1 or B7-2 alone developed clinical and pathologic EAE that was comparable to EAE in wild-type mice, indicating overlapping functions for B7-1 and B7-2. Resistance to EAE was not due to a lack of induction of T helper type 1 (Th1) cytokines, since T cells from B7-1/B7-2^−/− mice show reduced proliferative responses, but greater interferon γ production compared with T cells from wild-type mice. To study the role of B7 molecules in the effector phase of the disease, MOG 35-55–specific T lines were adoptively transferred into the B7-1/B7-2^−/− and wild-type mice. Clinical and histologic EAE were markedly reduced in B7-1/B7-2^−/− compared with wild-type recipient mice. These results demonstrate that B7 costimulation has critical roles not only in the initial activation and expansion of MOG-reactive T cells, but also in the effector phase of encephalitogenic T cell activation within the central nervous system.