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Programmed death receptor 1 (PD-1) is an important signaling molecule often involved in tumor-mediated suppression of activated immune cells. Binding of this receptor to its ligands, B7-H1 (PD-L1) and B7-DC (PD-L2), attenuates T cell activation, reduces IL-2 and IFN-γ secretion, decreases proliferation and cytotoxicity, and induces apoptosis. B7-DC-Ig is a recombinant protein that binds and targets PD-1. It is composed of an extracellular domain of murine B7-DC fused to the Fc portion of murine IgG2a. In this study, we demonstrate that B7-DC-Ig can enhance the therapeutic efficacy of vaccine when combined with cyclophosphamide. We show that this combination significantly enhances Ag-specific immune responses and leads to complete eradication of established tumors in 60% of mice and that this effect is CD8 dependent. We identified a novel mechanism by which B7-DC-Ig exerts its therapeutic effect that is distinctly different from direct blocking of the PD-L1-PD-1 interaction. In this study, we demonstrate that there are significant differences between levels and timing of surface PD-1 expression on different T cell subsets. We found that these differences play critical roles in anti-tumor immune effect exhibited by B7-DC-Ig through inhibiting proliferation of PD-1(high) CD4 T cells, leading to a significant decrease in the level of these cells, which are enriched for regulatory T cells, within the tumor. In addition, it also leads to a decrease in PD-1(high) CD8 T cells, tipping the balance toward nonexhausted functional PD-1(low) CD8 T cells. We believe that the PD-1 expression level on T cells is a crucial factor that needs to be considered when designing PD-1-targeting immune therapies.