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HIV-1-infected persons are at higher risk of lower respiratory tract infections than HIV-1-uninfected individuals. This suggests strongly that HIV-infected persons have specific impairment of pulmonary immune responses, but current understanding of how HIV alters pulmonary immunity is incomplete. Alveolar macrophages (AMs), comprising small and large macrophages, are major effectors of innate immunity in the lung. We postulated that HIV-1 impairs pulmonary innate immunity through impairment of AM physiological functions. AMs were obtained by bronchoalveolar lavage from healthy, asymptomatic, antiretroviral therapy-naive HIV-1-infected and HIV-1-uninfected adults. We used novel assays to detect in vivo HIV-infected AMs and to assess AM functions based on the HIV infection status of individual cells. We show that HIV has differential effects on key AM physiological functions, whereby small AMs are infected preferentially by the virus, resulting in selective impairment of phagocytic function. In contrast, HIV has a more generalized effect on AM proteolysis, which does not require direct viral infection. These findings provide new insights into how HIV alters pulmonary innate immunity and the phenotype of AMs that harbors the virus. They underscore the need to clear this HIV reservoir to improve pulmonary immunity and reduce the high incidence of lower respiratory tract infections in HIV-1-infected individuals.