Expression of the PD-1 receptor on T cells has been shown to provide an important inhibitory signal that down-modulates peripheral effector responses in normal tissues and tumors. Furthermore, PD-1 up-regulation on chronically activated T cells can maintain them in a partially reversible inactive state. The function of PD-1 in the very early stages of T-cell response to antigen in vivo has not been fully explored. In this study, we evaluate the role of PD-1 and its 2 B7 family ligands, B7-H1 (PD-L1) and B7-DC (PD-L2), in early fate decisions of CD8 T cells. We show that CD8 T cells specific for influenza hemagglutinin (HA) expressed as a self-antigen become functionally tolerized and express high levels of surface PD-1 by the time of their first cell division. Blockade of PD-1 or B7-H1, but not B7-DC, at the time of self-antigen encounter mitigates tolerance induction and results in CD8 T-cell differentiation into functional cytolytic T lymphocytes (CTLs). These findings demonstrate that, in addition to modulating effector functions in the periphery, B7-H1:PD-1 interactions regulate early T-cell-fate decisions.