diff --git a/src/services/mcpService.ts b/src/services/mcpService.ts
index 91a35bf..a451604 100644
--- a/src/services/mcpService.ts
+++ b/src/services/mcpService.ts
@@ -162,7 +162,7 @@ const createTransportFromConfig = (name: string, conf: ServerConfig): any => {
     const options: any = {};
     if (conf.headers && Object.keys(conf.headers).length > 0) {
       options.requestInit = {
-        headers: conf.headers,
+        headers: replaceEnvVars(conf.headers),
       };
     }
     transport = new StreamableHTTPClientTransport(new URL(conf.url || ''), options);
@@ -171,10 +171,10 @@ const createTransportFromConfig = (name: string, conf: ServerConfig): any => {
     const options: any = {};
     if (conf.headers && Object.keys(conf.headers).length > 0) {
       options.eventSourceInit = {
-        headers: conf.headers,
+        headers: replaceEnvVars(conf.headers),
       };
       options.requestInit = {
-        headers: conf.headers,
+        headers: replaceEnvVars(conf.headers),
       };
     }
     transport = new SSEClientTransport(new URL(conf.url), options);
diff --git a/tests/services/mcpService-headers.test.ts b/tests/services/mcpService-headers.test.ts
new file mode 100644
index 0000000..53db2bc
--- /dev/null
+++ b/tests/services/mcpService-headers.test.ts
@@ -0,0 +1,179 @@
+import { expandEnvVars, replaceEnvVars } from '../../src/config/index.js';
+
+describe('MCP Service - Headers Environment Variable Expansion', () => {
+  const originalEnv = process.env;
+
+  beforeEach(() => {
+    // Reset process.env before each test
+    jest.resetModules();
+    process.env = { ...originalEnv };
+  });
+
+  afterAll(() => {
+    // Restore original environment
+    process.env = originalEnv;
+  });
+
+  describe('expandEnvVars', () => {
+    it('should expand environment variables in ${VAR} format', () => {
+      process.env.CONTEXT7_API_KEY = 'ctx7sk-test123';
+      const result = expandEnvVars('${CONTEXT7_API_KEY}');
+      expect(result).toBe('ctx7sk-test123');
+    });
+
+    it('should expand environment variables in $VAR format', () => {
+      process.env.TEST_VAR = 'test-value';
+      const result = expandEnvVars('$TEST_VAR');
+      expect(result).toBe('test-value');
+    });
+
+    it('should expand multiple environment variables', () => {
+      process.env.VAR1 = 'value1';
+      process.env.VAR2 = 'value2';
+      const result = expandEnvVars('${VAR1}-and-${VAR2}');
+      expect(result).toBe('value1-and-value2');
+    });
+
+    it('should return empty string for undefined variables', () => {
+      const result = expandEnvVars('${UNDEFINED_VAR}');
+      expect(result).toBe('');
+    });
+
+    it('should handle strings without variables', () => {
+      const result = expandEnvVars('plain-string');
+      expect(result).toBe('plain-string');
+    });
+  });
+
+  describe('replaceEnvVars - Object (Headers)', () => {
+    it('should expand environment variables in header values', () => {
+      process.env.CONTEXT7_API_KEY = 'ctx7sk-d16example123';
+      const headers = {
+        CONTEXT7_API_KEY: '${CONTEXT7_API_KEY}',
+      };
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({
+        CONTEXT7_API_KEY: 'ctx7sk-d16example123',
+      });
+    });
+
+    it('should expand multiple headers with environment variables', () => {
+      process.env.API_KEY = 'test-api-key';
+      process.env.AUTH_TOKEN = 'test-auth-token';
+      const headers = {
+        'X-API-Key': '${API_KEY}',
+        Authorization: 'Bearer ${AUTH_TOKEN}',
+        'Content-Type': 'application/json',
+      };
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({
+        'X-API-Key': 'test-api-key',
+        Authorization: 'Bearer test-auth-token',
+        'Content-Type': 'application/json',
+      });
+    });
+
+    it('should handle $VAR format in headers', () => {
+      process.env.MY_KEY = 'my-value';
+      const headers = {
+        'X-Custom-Header': '$MY_KEY',
+      };
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({
+        'X-Custom-Header': 'my-value',
+      });
+    });
+
+    it('should return empty string for undefined variables in headers', () => {
+      const headers = {
+        'X-Undefined': '${UNDEFINED_VAR}',
+      };
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({
+        'X-Undefined': '',
+      });
+    });
+
+    it('should handle mix of variables and static values', () => {
+      process.env.TOKEN = 'secret123';
+      const headers = {
+        Authorization: 'Bearer ${TOKEN}',
+        'Content-Type': 'application/json',
+        'X-Custom': 'static-value',
+      };
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({
+        Authorization: 'Bearer secret123',
+        'Content-Type': 'application/json',
+        'X-Custom': 'static-value',
+      });
+    });
+
+    it('should handle empty object', () => {
+      const headers = {};
+      const result = replaceEnvVars(headers);
+      expect(result).toEqual({});
+    });
+  });
+
+  describe('replaceEnvVars - Array (Args)', () => {
+    it('should expand environment variables in array elements', () => {
+      process.env.PORT = '3000';
+      const args = ['--port', '${PORT}'];
+      const result = replaceEnvVars(args);
+      expect(result).toEqual(['--port', '3000']);
+    });
+
+    it('should handle multiple variables in array', () => {
+      process.env.HOST = 'localhost';
+      process.env.PORT = '8080';
+      const args = ['--host', '${HOST}', '--port', '${PORT}'];
+      const result = replaceEnvVars(args);
+      expect(result).toEqual(['--host', 'localhost', '--port', '8080']);
+    });
+  });
+
+  describe('Real-world Context7 Scenario', () => {
+    it('should correctly expand Context7 API key from environment', () => {
+      // Simulate the environment variable being set in the container
+      process.env.CONTEXT7_API_KEY = 'ctx7sk-d16examplekey123';
+
+      // Simulate the configuration from mcp_settings.json
+      const serverConfig = {
+        type: 'streamable-http',
+        url: 'https://mcp.context7.com/mcp',
+        headers: {
+          CONTEXT7_API_KEY: '${CONTEXT7_API_KEY}',
+        },
+        enabled: true,
+      };
+
+      // Simulate what happens in createTransportFromConfig
+      const expandedHeaders = replaceEnvVars(serverConfig.headers);
+
+      // Verify that the environment variable was correctly expanded
+      expect(expandedHeaders.CONTEXT7_API_KEY).toBe('ctx7sk-d16examplekey123');
+      expect(expandedHeaders.CONTEXT7_API_KEY).not.toBe('${CONTEXT7_API_KEY}');
+      expect(expandedHeaders.CONTEXT7_API_KEY).toMatch(/^ctx7sk-/);
+    });
+
+    it('should handle case when environment variable is not set', () => {
+      // Don't set the environment variable
+      delete process.env.CONTEXT7_API_KEY;
+
+      const serverConfig = {
+        type: 'streamable-http',
+        url: 'https://mcp.context7.com/mcp',
+        headers: {
+          CONTEXT7_API_KEY: '${CONTEXT7_API_KEY}',
+        },
+        enabled: true,
+      };
+
+      const expandedHeaders = replaceEnvVars(serverConfig.headers);
+
+      // Should be empty string when env var is not set
+      expect(expandedHeaders.CONTEXT7_API_KEY).toBe('');
+    });
+  });
+});