HAI-1 [HGF (hepatocyte growth factor) activator inhibitor-1] is a Kunitz-type transmembrane serine protease inhibitor that forms inhibitor complexes with the trypsin-like serine protease, matriptase. HAI-1 is essential for mouse placental development and embryo survival and together with matriptase it is a key regulator of carcinogenesis. HAI-1 is expressed in polarized epithelial cells, which have the plasma membrane divided by tight junctions into an apical and a basolateral domain. In the present study we show that HAI-1 at steady-state is mainly located on the basolateral membrane of both Madin-Darby canine kidney cells and mammary gland epithelial cells. After biosynthesis, HAI-1 is exocytosed mainly to the basolateral plasma membrane from where 15% of the HAI-1 molecules are proteolytically cleaved and released into the basolateral medium. The remaining membrane-associated HAI-1 is endocytosed and then recycles between the basolateral plasma membrane and endosomes for hours until it is transcytosed to the apical plasma membrane. Minor amounts of HAI-1 present at the apical plasma membrane are proteolytically cleaved and released into the apical medium. Full-length membrane-bound HAI-1 has a half-life of 1.5 h and is eventually degraded in the lysosomes, whereas proteolytically released HAI-1 is more stable. HAI-1 is co-localized with its cognate protease, matriptase, at the basolateral plasma membrane. We suggest that HAI-1, in addition to its protease inhibitory function, plays a role in transporting matriptase as a matriptase-HAI-1 complex from the basolateral plama membrane to the apical plasma membrane, as matriptase is known to interact with prostasin, located at the apical plasma membrane.