Surfactant protein B is essential to the function of pulmonary surfactant and to lamellar body genesis in alveolar epithelial type 2 cells. The bioactive, mature SP-B is derived from multi-step post-translational proteolysis of a larger proprotein. The identity of the proteases involved in carboxyterminal cleavage of proSP-B remains uncertain. This cleavage event distinguishes SP-B production in type 2 cells from less complete processing in bronchiolar Clara cells. We previously identified pepsinogen C as an alveolar type 2 cell specific protease that was developmentally regulated in the human fetal lung. We report that pepsinogen C cleaved recombinant proSP-B at M302 in addition to an aminoterminal cleavage at S197. Using a well-described model of type 2 cell differentiation, siRNA knockdown of pepsinogen C inhibited production of mature SP-B whereas overexpression of pepsinogen C increased SP-B production. Inhibition of SP-B production recapitulated the SP-B deficient phenotype evident by aberrant lamellar body genesis. Together, these data support a primary role for pepsinogen C in SP-B proteolytic processing in alveolar type 2 cells.