Surfactant protein B (SP-B) is an essential constituent of pulmonary surfactant. SP-B is synthesized in alveolar type II cells as a preproprotein and processed to the mature peptide by the cleavage of NH2- and COOH-terminal peptides. An aspartyl protease has been suggested to cleave the NH2-terminal propeptide resulting in a 25-kDa intermediate. Napsin, an aspartyl protease expressed in alveolar type II cells, was detected in fetal lung homogenates as early as day 16 of gestation, 1 day before the onset of SP-B expression and processing. Napsin was localized to multivesicular bodies, the site of SP-B proprotein processing in type II cells. Incubation of SP-B proprotein from type II cells with a crude membrane extract from napsin-transfected cells resulted in enhanced levels of a 25-kDa intermediate. Purified napsin cleaved a recombinant SP-B/EGFP fusion protein within the NH2-terminal propeptide between Leu178 and Pro179, 22 amino acids upstream of the NH2 terminus of mature SP-B. Cathepsin H, a cysteine protease also implicated in pro-SP-B processing, cleaved SP-B/EGFP fusion protein 13 amino acids upstream of the NH2 terminus of mature SP-B. Napsin did not cleave the COOH-terminal peptide, whereas cathepsin H cleaved the boundary between mature SP-B and the COOH-terminal peptide and at several other sites within the COOH-terminal peptide. Knockdown of napsin by small interfering RNA resulted in decreased levels of mature SP-B and mature SP-C in type II cells. These results suggest that napsin, cathepsin H, and at least one other enzyme are involved in maturation of the biologically active SP-B peptide.