Th1-derived IFN-gamma targets naive T cells and inhibits Th17 development. However, Th1, Th17, and memory but not naive T cells are colocalized in an inflammatory environment. To demonstrate the kinetic relationship between these T cell subsets, we investigated the role of IFN-gamma in regulating the development and balance between Th17 and Th1 in humans. We show that IFN-gamma stimulates B7-H1 expression on APC subsets and abates their Th1 polarization capacity in a B7-H1-dependent manner. Interestingly, IFN-gamma triggers APCs to produce IL-1 and IL-23 and enables them to induce memory Th17 expansion via IL-1 and IL-23 in a B7-H1-independent manner. We propose a novel dynamic between Th1 and Th17 in the course of inflammation as follows: Th1-mediated inflammation is attenuated by IFN-gamma-induced B7-H1 on APCs and is evolved toward Th17-mediated chronic inflammation by IFN-gamma-induced, APC-derived IL-1 and IL-23. Our study challenges the dogma that IFN-gamma suppresses Th17 and enhances Th1 development.