The relatively recent detection of nitric oxide (NO) in the exhaled breath has prompted a great deal of experimentation in an effort to understand the pulmonary exchange dynamics. There has been very little progress in theoretical studies to assist in the interpretation of the experimental results. We have developed a two-compartment model of the lungs in an effort to explain several fundamental experimental observations. The model consists of a nonexpansile compartment representing the conducting airways and an expansile compartment representing the alveolar region of the lungs. Each compartment is surrounded by a layer of tissue that is capable of producing and consuming NO. Beyond the tissue barrier in each compartment is a layer of blood representing the bronchial circulation or the pulmonary circulation, which are both considered an infinite sink for NO. All parameters were estimated from data in the literature, including the production rates of NO in the tissue layers, which were estimated from experimental plots of the elimination rate of NO at end exhalation (ENO) vs. the exhalation flow rate (VE). The model is able to simulate the shape of the NO exhalation profile and to successfully simulate the following experimental features of endogenous NO exchange: 1) an inverse relationship between exhaled NO concentration and VE, 2) the dynamic relationship between the phase III slope and VE, and 3) the positive relationship between ENO and VE. The model predicts that these relationships can be explained by significant contributions of NO in the exhaled breath from the nonexpansile airways and the expansile alveoli. In addition, the model predicts that the relationship between ENO and VE can be used as an index of the relative contributions of the airways and the alveoli to exhaled NO.