Nitric oxide (NO) appears in the exhaled breath and is a potentially important clinical marker. The accepted model of NO gas exchange includes two compartments, representing the airway and alveolar region of the lungs, but neglects axial diffusion. We incorporated axial diffusion into a one-dimensional trumpet model of the lungs to assess the impact on NO exchange dynamics, particularly the impact on the estimation of flow-independent NO exchange parameters such as the airway diffusing capacity and the maximum flux of NO in the airways. Axial diffusion reduces exhaled NO concentrations because of diffusion of NO from the airways to the alveolar region of the lungs. The magnitude is inversely related to exhalation flow rate. To simulate experimental data from two different breathing maneuvers, NO airway diffusing capacity and maximum flux of NO in the airways needed to be increased approximately fourfold. These results depend strongly on the assumption of a significant production of NO in the small airways. We conclude that axial diffusion may decrease exhaled NO levels; however, more advanced knowledge of the longitudinal distribution of NO production and diffusion is needed to develop a complete understanding of the impact of axial diffusion.