The inability of epithelial cells from the cornea and other tissues to respond to LPS is reportedly due to low expression of the TLR4 co-receptor MD-2. We generated MD-2(-/-) bone marrow chimeras, and showed that MD-2 expression on non-myeloid cells was sufficient to mediate LPS-induced corneal inflammation. As IFN-γ is produced during Pseudomonas aeruginosa corneal infection, we examined the role of this cytokine on MD-2 expression by primary human corneal epithelial (HCE) cells and HCE cell lines. Exogenous IFN-γ was found to induce MD-2 mRNA, MD-2 cell surface expression, and LPS responsiveness as determined by p65 translocation to the nucleus and production of IL-6, CXCL1, and CXCL8/IL-8. Incubation with either the AG490 JAK2 inhibitor or with STAT1 siRNA blocked STAT1 phosphorylation and MD-2 transcription. Furthermore, EMSA analysis demonstrated that STAT1 binds to the MD-2 promoter, indicating that STAT1 is an MD-2 transcription factor. Together, these findings demonstrate that IFN-γ induces MD-2 expression and LPS responsiveness in HCE cells by JAK-2-dependent STAT1 activation and direct binding to the MD-2 promoter. Furthermore, given our findings on LPS-induced corneal inflammation, it is likely that IFN-γ-induced MD-2 expression by corneal epithelial cells contributes to the host response in vivo, determining the extent of tissue damage and bacterial clearance.