Interstitial lung diseases (ILDs) comprise a group of lung disorders characterized by various levels of inflammation and fibrosis. The current understanding of the mechanisms underlying the development and progression of ILD strongly suggests a central role of the alveolar epithelium. Following injury, alveolar epithelial cells (AECs) may actively participate in the restoration of a normal alveolar architecture through a coordinated process of re-epithelialization, or in the development of fibrosis through a process known as epithelial-mesenchymal transition (EMT). Complex networks orchestrate EMT leading to changes in cell architecture and behaviour, loss of epithelial characteristics and gain of mesenchymal properties. In the lung, AECs themselves may serve as a source of fibroblasts and myofibroblasts by acquiring a mesenchymal phenotype. This review covers recent knowledge on the role of alveolar epithelium in the pathogenesis of ILD. The mechanisms underlying disease progression are discussed, with a main focus on the apoptotic pathway, the endoplasmic reticulum stress response and the developmental pathway.