The lung alveolar surface is covered by two morphologically and functionally distinct cells: alveolar epithelial cell types I and II (AEC I and II). The functions of AEC II, including surfactant release, cell differentiation and ion transport, have been extensively studied. However, relatively little is known regarding the physiological functions of AEC I. Global gene expression profiling of freshly isolated AEC I and II revealed that many genes were differentially expressed in AEC I. These genes have a diversity of functions, including cell defence. Nine out of 10 selected genes were verified by quantitative real-time PCR. Two genes, apolipoprotein E (Apo E) and transferrin, were further characterized and functionally studied. Immunohistochemistry indicated that both proteins were specifically localized in AEC I. Up-regulation of Apo E and transferrin was observed in hyperoxic lungs. Functionally, Apo E and transferrin play a protective role against oxidative stress in an animal model. Our studies suggest that AEC I is not just a simple barrier for gas exchange, but a functional cell that protects alveolar epithelium from injury.