Immune rejection of tumors is mediated by IFNγ production and T-cell cytolytic activity. These processes are impeded by PD-1, a coinhibitory molecule expressed on T cells that is elevated in tumor-infiltrating lymphocytes (TIL). PD-1 elevation may reflect T-cell exhaustion marked by decreased proliferation, production of type I cytokines, and poor cytolytic activity. Although anti–PD-1 antibodies enhance IFNγ secretion after stimulation of the T-cell receptor (TCR), the mechanistic link between PD-1 and its effects on T-cell help (Tc1/Th1 skewing) remains unclear. In prospectively collected cancer tissues, we found that TIL exhibited dampened Tc1/Th1 skewing and activation compared with peripheral blood lymphocytes (PBL). When PD-1 bound its ligand PD-L1, we observed a marked suppression of critical TCR target genes and Th1 cytokines. Conversely, PD-1 blockade reversed these suppressive effects of PD-1:PD-L1 ligation. We also found that the TCR-regulated phosphatase SHP-2 was expressed higher in TIL than in PBL, tightly correlating with PD-1 expression and negative regulation of TCR target genes. Overall, these results defined a PD-1/SHP-2/STAT1/T-bet signaling axis mediating the suppressive effects of PD-1 on Th1 immunity at tumor sites. Our findings argue that PD-1 or SHP-2 blockade will be sufficient to restore robust Th1 immunity and T-cell activation and thereby reverse immunosuppression in the tumor microenvironment. Cancer Res; 75(3); 508–18. ©2014 AACR.