Professional phagocytes increase their consumption of molecular oxygen during the phagocytosis of microbes or when encountering a variety of nonparticulate stimuli. In these circumstances, oxygen is reduced by the phagocyte NADPH oxidase, and reactive oxygen species (ROS), which are important for the microbicidal activity of the cells, are generated. The structure and function of the NADPH oxidase have been resolved in part by studying cells from patients with chronic granulomatous disease (CGD), a condition characterized by the inability of phagocytes to assemble a functional NADPH oxidase and thus to produce ROS. As a result, patients with CGD have a predisposition to infections as well as a variety of inflammatory symptoms. A long-standing paradigm has been that NADPH oxidase assembly occurs exclusively in the plasma membrane or invaginations thereof (phagosomes). A growing body of evidence points to the possibility that phagocytes are capable of NADPH oxidase assembly in nonphagosomal intracellular membranes, resulting in ROS generation within intracellular organelles also in the absence of phagocytosis. The exact nature of these ROS-producing organelles is yet to be determined, but granules are prime suspects. Recent clinical findings indicate that the generation of intracellular ROS by NADPH oxidase activation is important for limiting inflammatory reactions and that intracellular and extracellular ROS production are regulated differently. Here we discuss the accumulating knowledge of intracellular ROS production in phagocytes and speculate on the precise role of these oxidants in regulating the inflammatory process.