The classical view of oxygen (O2) uptake in pulmonary capillaries assumes implicitly that capillary blood can be regarded as a continuous homogeneous hemoglobin solution. In this study a theoretical model was used to examine the role played by the particulate (two-phase) nature of blood on pulmonary oxygen exchange. Red cells were modelled as discrete hemoglobin (Hb) containing spheres flowing in single file suspension through a cylindrical capillary surrounded by a uniform annulus of alveolar tissue. The model accounted for the free diffusion of O2 from alveolar air space through tissue and plasma, free and Hb facilitated diffusion of O2 inside red cells, and the intracellular kinetics of O2-Hb binding. Oxygen uptake was driven by a specified O2 tension at the alveolar surface. The computed pulmonary diffusing capacity (DLO2) decreased with increasing spacing (Ls) between red cells. The reduction in DLO2 with increasing Ls was marshalled more by a reduction in membrane diffusing capacity (DMO2), than by the reduction in erythrocyte diffusing capacity (DeO2). The dependence of DMO2 on cell spacing stemmed from the manner in which O2 flowed across the alveolar surface into the discrete sinks (red cells) within the capillaries. The degree to which Ls influenced DMO2 was dependent on tissue and plasma layer thickness relative to red cell dimensions. The results indicate that the functional area of the alveolo-capillary membrane for O2 exchange depends on the red cell content of capillaries. Thus, DMO2 is not dictated solely by the morphology of the exchange apparatus (and physical parameters), but has functional determinants as well.