During disease progression in myelodysplastic syndromes (MDS), clonal blasts gain a more aggressive nature, whereas nonclonal immune cells become less efficient via an unknown mechanism. Using MDS cell lines and patient samples, we showed that the expression of an immunoinhibitory molecule, B7-H1 (CD274), was induced by interferon-gamma (IFNgamma) and tumor necrosis factor-alpha (TNFalpha) on MDS blasts. This induction was associated with the activation of nuclear factor-kappaB (NF-kappaB) and nearly completely blocked by an NF-kappaB inhibitor, pyrrolidine dithiocarbamate (PDTC). B7-H1(+) MDS blasts had greater intrinsic proliferative capacity than B7-H1(-) MDS blasts when examined in various assays. Furthermore, B7-H1(+) blasts suppressed T-cell proliferation and induced T-cell apoptosis in allogeneic cocultures. When fresh bone marrow samples from patients were examined, blasts from high-risk MDS patients expressed B7-H1 molecules more often compared with those from low-risk MDS patients. Moreover, MDS T cells often overexpressed programmed cell death 1 (PD-1) molecules that transmit an inhibitory signal from B7-H1 molecules. Taken together, these findings provide new insight into MDS pathophysiology. IFNgamma and TNFalpha activate NF-kappaB that in turn induces B7-H1 expression on MDS blasts. B7-H1(+) MDS blasts have an intrinsic proliferative advantage and induce T-cell suppression, which may be associated with disease progression in MDS.