Surfactant protein B (SP-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 multistep post-translational proteolysis of a larger proprotein. The identity of the proteases involved in carboxyl-terminal 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 Met(302) in addition to an amino-terminal cleavage at Ser(197). Using a well described model of type 2 cell differentiation, small interfering RNA 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.