Nitric oxide (NO) was first detected in the exhaled breath more than a decade ago and has since been investigated as a noninvasive means of assessing lung inflammation. Exhaled NO arises from the airway and alveolar compartments, and new analytical methods have been developed to characterize these sources. A simple two-compartment model can adequately represent many of the observed experimental observations of exhaled concentration, including the marked dependence on exhalation flow rate. The model characterizes NO exchange by using three flow-independent exchange parameters. Two of the parameters describe the airway compartment (airway NO diffusing capacity and either the maximum airway wall NO flux or the airway wall NO concentration), and the third parameter describes the alveolar region (steady-state alveolar NO concentration). A potential advantage of the two-compartment model is the ability to partition exhaled NO into an airway and alveolar source and thus improve the specificity of detecting altered NO exchange dynamics that differentially impact these regions of the lungs. Several analytical techniques have been developed to estimate the flow-independent parameters in both health and disease. Future studies will focus on improving our fundamental understanding of NO exchange dynamics, the analytical techniques used to characterize NO exchange dynamics, as well as the physiological interpretation and the clinical relevance of the flow-independent parameters.