BACKGROUND: Lung inflammation (alveolitis) may cause lung fibrosis in scleroderma. OBJECTIVE: To determine whether cyclophosphamide treatment is associated with retention of lung function and improved survival in scleroderma patients with alveolitis. DESIGN: Retrospective cohort study. SETTING: Johns Hopkins and University of Maryland Scleroderma Center. PATIENTS: 103 patients with scleroderma who had bronchoalveolar lavage or lung biopsy. INTERVENTION: Cyclophosphamide therapy. MEASUREMENTS: 1) Serial measurement of forced vital capacity (FVC) and carbon monoxide diffusing capacity and 2) survival. RESULTS: During a median follow-up of 13 months after bronchoalveolar lavage or biopsy, patients with alveolitis who did not receive cyclophosphamide therapy experienced a decrease in FVC (mean difference, -0.28 L [95% Cl, -0.41 to -0.16 L] and -7.1% of the predicted value [Cl, -10.9% to -4.0%]). Carbon monoxide diffusing capacity also decreased in these patients (mean difference, -3.3 x mmol min(-1) x kPa(-1) [Cl, -4.6 to -2.1 mmol x min(-1) x kPa(-1)] and -9.6% of the predicted value [Cl, -16.7% to -2.4%]). During a median follow-up of 16 months, patients with alveolitis who received cyclophosphamide were more likely to have a good outcome (stabilization or improvement) in FVC (relative risk, 2.5 [Cl, 1.5 to 4.1]) and diffusing capacity (relative risk, 1.5 [Cl, 1.0 to 2.2]). These patients also had improved survival; the median survival rate was 89% (25th, 75th percentiles, 84%, 94%) compared with 71% (25th, 75th percentiles, 55%, 86%) in untreated patients (P = 0.01, log-rank test). CONCLUSIONS: The presence of lung inflammation identifies patients with scleroderma who are more likely to have worsening lung function. Lung function outcomes and survival are improved in patients with alveolitis who receive cyclophosphamide.