Abstract Tumor-associated macrophages (TAMs) express cytokines and mediators that can suppress T cell recruitment and activation in the tumor microenvironment, support tumor growth, and promote resistance to therapy. We found that Arginase-1 is produced in high quantities by TAMs and tumor cells in head and neck cancer tumors with different background mutations. High levels of Arginase-1 were found in tumor samples and the circulation of patients and animal models of head and neck cancer. Arginase-1 is released into the cellular microenvironment and packed into the exosomes in a metabolically active form. Mechanistically, Arginase-1 further propagated the anti-inflammatory macrophage phenotype in the tumor microenvironment and induced the epithelial-mesenchymal transition (EMT) by activation of STAT3 and beta-catenin. Arginase-1 released from the tumor further induced activation of the autophagy cascade and the PI3K pathway in TAMs. Mechanistic results showed that STAT3 activation by Arginase-1 containing exosomes has a positive feedback effect on the expression of Arginase-1, Il-1β, and lead to inflammasome activation. The silencing of STAT3 negated the effect of Arginase-1 containing exosomes and led to modulation of the inflammasome activation in the head and neck cancer tumor microenvironment. These results indicate a mechanistic role of TAMs and Arginase-1 containing exosomes in the tumor microenvironment by activation of autophagy and inflammasome, and induction of the EMT. The mechanistic links presented in this study regarding the role of arginase in head and neck cancer pathogenesis could be targeted as therapeutic strategies.