Efficient gas exchange in the lungs depends on regulation of the amount of fluid in the thin (average 0.2 μm) liquid layer lining the alveolar epithelium. Fluid fluxes are regulated by ion transport across the alveolar epithelium, which is composed of alveolar type I (TI) and type II (TII) cells. The accepted paradigm has been that TII cells, which cover <5% of the internal surface area of the lung, transport Na⁺ and Cl⁻ and that TI cells, which cover >95% of the surface area, provide a route for water absorption. Here we present data that TI cells contain functional epithelial Na⁺ channels (ENaC), pimozide-sensitive cation channels, K⁺ channels, and the cystic fibrosis transmembrane regulator. TII cells contain ENaC and cystic fibrosis transmembrane regulator, but few pimozide-sensitive cation channels. These findings lead to a revised paradigm of ion and water transport in the lung in which (i) Na⁺ and Cl⁻ transport occurs across the entire alveolar epithelium (TI and TII cells) rather than only across TII cells; and (ii) by virtue of their very large surface area, TI cells are responsible for the bulk of transepithelial Na⁺ transport in the lung.