Recent advances in the fields of microfabrication, biomaterials, and tissue engineering have provided new opportunities for developing biomimetic and functional tissues with potential applications in disease modeling, drug discovery, and replacing damaged tissues. An intact epithelium plays an indispensable role in the functionality of several organs such as the trachea, esophagus, and cornea. Furthermore, the integrity of the epithelial barrier and its degree of differentiation would define the level of success in tissue engineering of other organs such as the bladder and the skin. In this review, we focus on the challenges and requirements associated with engineering of epithelial layers in different tissues. Functional epithelial layers can be achieved by methods such as cell sheets, cell homing, and in situ epithelialization. However, for organs composed of several tissues, other important factors such as (1) in vivo epithelial cell migration, (2) multicell-type differentiation within the epithelium, and (3) epithelial cell interactions with the underlying mesenchymal cells should also be considered. Recent successful clinical trials in tissue engineering of the trachea have highlighted the importance of a functional epithelium for long-term success and survival of tissue replacements. Hence, using the trachea as a model tissue in clinical use, we describe the optimal structure of an artificial epithelium as well as challenges of obtaining a fully functional epithelium in macroscale. One of the possible remedies to address such challenges is the use of bottom-up fabrication methods to obtain a functional epithelium. Modular approaches for the generation of functional epithelial layers are reviewed and other emerging applications of microscale epithelial tissue models for studying epithelial/mesenchymal interactions in healthy and diseased (e.g., cancer) tissues are described. These models can elucidate the epithelial/mesenchymal tissue interactions at the microscale and provide the necessary tools for the next generation of multicellular engineered tissues and organ-on-a-chip systems.