Airway rejection after lung transplantation is recognized histologically as lymphocytic bronchiolitis (LB). We hypothesized that inhaled steroids could control LB and that changes in exhaled nitric oxide (eNO) would correlate with the development of LB and also have a role in monitoring response to treatment. A cohort of 120 lung transplant (LT) recipients attending for review and biopsy had eNO measurements, FEV1, lavage microbiology, and biopsy histology performed prospectively. Wilcoxon signed-rank test was used to assess the significance of changes in eNO and FEV1. The coefficient of reproducibility of eNO measurement in stable recipients was 2.36 ppb. Fourteen developed graft dysfunction owing to isolated LB and were treated with inhaled budesonide 800 microg twice daily. They showed significant increases in eNO at diagnosis, median (range) 10.9 ppb (4.6 to 48) ppb compared with baseline, 4.33 (1.0 to 10.76), p = 0.008, and a decrease in FEV1. After inhaled treatment, both eNO and FEV1 returned to baseline values. Seven developed acute vascular rejection (with or without LB) and were treated with oral corticosteroids; no changes in eNO occurred at diagnosis or after treatment. Serial eNO measurements provide a useful noninvasive method of identifying airway inflammation in LT recipients. Inhaled budesonide may be a useful addition to systemic immunosuppressants in controlling airway inflammation posttransplant.