PD-1 and its ligands, B7-H1/PD-L1 and B7-DC/PD-L2, have been identified recently as CD28-B7 family molecules that are implicated in immune regulation. Lichen planus (LP) is a T cell-mediated chronic inflammatory mucocutaneous disease. We investigated the expression and function of PD-1 and its two ligands in LP. Immunohistochemical examination revealed the abundant expression of PD-1 and B7-H1 in infiltrating T cells and macrophages, and lower-level expression of B7-DC on macrophages in the subepithelium. Interestingly, substantial expression of B7-H1 on keratinocytes (KCs) was found close to the numerous T cell infiltrates in the subepithelium. Unstimulated cultured KCs expressed both B7-H1 and B7-DC, and their expression was upregulated by proinflammatory cytokines, particularly IFN-gamma. The T-cell proliferative responses and IFN-gamma production that were induced by IFN-gamma-treated KCs were augmented preferentially by anti-B7-H1 mAb, but not by anti-B7-DC mAb. These results indicate the regulatory role of B7-H1 on KCs in the interactions with T cells. Our results suggest that the induction of B7-H1 on KCs may play an important role in tolerance induction in the inflamed oral mucosa and skin.