The ability to manipulate the size and surface properties of nanomaterials makes them a promising vector for improving drug delivery and efficacy. Inhalation is a desirable route of administration as nanomaterials preferentially deposit in the alveolar region, a large surface area for drug absorption. However, as yet, the mechanisms by which particles translocate across the alveolar epithelial layer are poorly understood. Here we show that human alveolar type I epithelial cells internalize nanoparticles, whereas alveolar type II epithelial cells do not, and that nanoparticles translocate across the epithelial monolayer but are unable to penetrate the tight junctions between cells, ruling out paracellular translocation. Furthermore, using siRNA, we demonstrate that 50 nm nanoparticles enter largely by passive diffusion and are found in the cytoplasm, whereas 100 nm nanoparticles enter primarily via clathrin- and also caveolin-mediated endocytosis and are found in endosomes. Functionalization of nanoparticles increases their uptake and enhances binding of surfactant which further promotes uptake. Thus, we demonstrate that uptake and translocation across the pulmonary epithelium is controlled by alveolar type I epithelial cells, and furthermore, we highlight a number of factors that should be considered when designing new nanomedicines in order to improve drug delivery to the lung.