Acute respiratory distress syndrome (ARDS) is a life-threatening ailment characterized by severe lung injury involving inflammatory cell recruitment to the lung, cytokine production, surfactant dysfunction, and up-regulation of nitric oxide synthase 2 (NOS2) resulting in nitric oxide (NO) production. We hypothesized that NO production from NOS2 expressed in lung parenchymal cells in a murine model of ARDS would correlate with abnormal surfactant function and reduced surfactant protein-B (SP-B) expression. Pulmonary responses to nebulized endotoxin (lipopolysaccharide, LPS) were evaluated in wild-type (WT) mice, NOS2 null (-/-) mice, and NOS2-chimeric animals derived from bone marrow transplantation. NOS2-/- animals exhibited significantly less physiologic lung dysfunction and loss of SP-B expression than did WT animals. However, lung neutrophil recruitment and bronchoalveolar lavage cytokine levels did not significantly differ between NOS2-/- and WT animals. Chimeric animals for NOS2 exhibited the phenotype of the recipient and therefore demonstrated that parenchymal production of NOS2 is critical for the development of LPS-induced lung injury. Furthermore, administration of NO donors, independent of cytokine stimulation, decreased SP-B promoter activity and mRNA expression in mouse lung epithelial cells. This study demonstrates that expression of NOS2 in lung epithelial cells is critical for the development of lung injury and mediates surfactant dysfunction independent of NOS2 inflammatory cell expression and cytokine production.