Transforming growth factor beta (TGF-β) has an important role in mediating T-cell suppression in B-cell non-Hodgkin lymphoma (NHL). However, the underlying mechanism responsible for TGF-β-mediated inhibition of effector memory T (Tm) cells is largely unknown. As reported here, we show that exhaustion is a major mechanism by which TGF-β inhibits Tm cells, and TGF-β mediated exhaustion is associated with upregulation of CD70. We found that TGF-β upregulates CD70 expression on effector Tm cells while it preferentially induces Foxp3 expression in naive T cells. CD70 induction by TGF-β is Smad3-dependent and involves IL-2/Stat5 signaling. CD70+ T cells account for TGF-β-induced exhaustion of effector Tm cells. Both TGF-β-induced and preexisting intratumoral CD70+ effector Tm cells from B-cell NHL have an exhausted phenotype and express higher levels of PD-1 and TIM-3 compared with CD70- T cells. Signaling transduction, proliferation and cytokine production are profoundly decreased in these cells, and they are highly susceptible to apoptosis. Clinically, intratumoral CD70-expressing T cells are prevalent in follicular B-cell lymphoma (FL) biopsy specimens, and increased numbers of intratumoral CD70+ T cells correlate with an inferior patient outcome. These findings confirm TGF-β-mediated effector Tm cell exhaustion as an important mechanism of immune suppression in B-cell NHL.