To demonstrate that rat alveolar macrophages (AM) exhibited the PepT1-like transporter for the uptake of arginine (Arg)-containing small peptides and utilized these peptides as direct substrates for nitric oxide (NO) production. NO is an important mediator that, on one hand, protects the lung from bacteria infection and, on the other hand, augments inflammatory lung injury. The uptake of small peptides by rat AM was evaluated using fluorescein isothiocyanate (FITC)-labeled (*) peptides (Arg-Lys*, Gly-Sar-Lys*, and beta-Ala-Lys*), high-performance liquid chromatography (HPLC) analysis of potential peptide degradation, and known inhibitors of Arg and PepT1 transport. NO production by AM through Arg and Arg-containing peptides was studied with and without inhibition by transport inhibitors. The presence of PepT1-like transporter on AM was evaluated using anti-PepT1 antisera and Western blot analysis. The substrate specificity of Arg-Gly and Arg-Gly-Asp was determined using purified inducible NO synthase (iNOS). The availability of Arg-containing peptides in the lung was determined by HPLC analysis of bronchoalveolar lavage (BAL) fluid. The FITC-labeled peptides were internalized by AM without degradation. The uptake of Arg-Lys*, beta-Ala-Lys*, and Gly-Sar-Lys* was blocked (approximately 50%) by cephradine (an inhibitor of PepT1 for peptide transport) but not by Lys (an inhibitor on cationic amino acid transporter 2B for Arg transport). The NO production by AM through Arg-containing peptides was significantly blocked only by PepT1 inhibitors and by an anti-PepT1 antibody in a dose-dependent manner. These inhibitors had no effect on the AM production of NO using Arg as a substrate. Arg-Gly and Arg-Gly-Asp were found to be direct substrates for iNOS with similar Km and Vmax values to those of Arg. But, the production of NO by AM using these peptides as substrates was 2-fold higher than using Arg as a substrate. Both Arg-Gly and Arg-Gly-Asp were found in the BAL fluid. The presence of a PepT1-like transporter on AM was confirmed by Western blotting. This study shows that AM exhibit PepT1-like transporter for small peptide uptake. Arginine-containing peptides, through the PepT1 transporter system, can serve as direct substrates of iNOS for the production of NO by AM.