Of 61 men with diffuse pulmonary fibrosis or granulomatosis, 3 had normal pulmonary function; 8 had isolated diffusion defects. Because of disproportionate impairment of different aspects of lung function, few inferences may be made from lung mechanics or spirometry about the normalcy of gas exchange. In restricted patients, lung compliance was consistently lower than predicted from the normal relationship between lung volume and compliance. This may be related to the greater inspiratory force available at the reduced lung volumes characteristic of such patients. Abnormal indices of alveolar mixing without abnormally decreased compliances on rapid breathing were present in a 3rd of 44 unobstructed patients, suggesting that regional alveolar stiffening without obstruction was responsible for their uneven ventilation. Forty-two of 59 patients had resting arterial hypoxemia. Their mean diffusing capacity averaged 1/2 the mean of the patients without hypoxemia. Resting hypoxemia remaining unchanged or worsening on exercise was the usual arterial blood response. Arterial hypoxemia was more severe than could be accounted for by the observed diffusion defect indicating a coexisting ventilation-per-fusion defect. Correlation between hypoxemia and diffusing capacity impairment suggested a close association of ventilation-perfusion and diffusion defects. Eight patients with alveolar hypoventilation had severely impaired respiratory mechanics, the defect being purely restrictive in 2. Fourteen patients with alveolar hyperventilation had mild mechanical abnormalities but serious impairment of oxy-genation.