The growth, survival, and metabolic activities of multicellular organisms at the cellular level are regulated by intracellular signaling, systemic homeostasis and the pericellular microenvironment. Pericellular proteolysis has a crucial role in processing bioactive molecules in the microenvironment and thereby has profound effects on cellular functions. Hepatocyte growth factor activator inhibitor type 1 (HAI-1) and HAI-2 are type I transmembrane serine protease inhibitors expressed by most epithelial cells. They regulate the pericellular activities of circulating hepatocyte growth factor activator and cellular type II transmembrane serine proteases (TTSPs), proteases required for the activation of hepatocyte growth factor (HGF)/scatter factor (SF). Activated HGF/SF transduces pleiotropic signals through its receptor tyrosine kinase, MET (coded by the proto-oncogene MET), which are necessary for cellular migration, survival, growth and triggering stem cells for accelerated healing. HAI-1 and HAI-2 are also required for normal epithelial functions through regulation of TTSP-mediated activation of other proteases and protease-activated receptor 2, and also through suppressing excess degradation of epithelial junctional proteins. This review summarizes current knowledge regarding the mechanism of pericellular HGF/SF activation and highlights emerging roles of HAIs in epithelial development and integrity, as well as tumorigenesis and progression of transformed epithelial cells.