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Background Dexamethasone (Dex) limits and all-trans-retinoic acid (RA) promotes alveolarization. While structural changes resulting from such hormonal exposures are known, their functional consequences are unclear. Methods Neonatal rats were treated with Dex and/or RA during the first two weeks of life or were given RA after previous exposure to Dex. Morphology was assessed by light microscopy and radial alveolar counts. Function was evaluated by plethysmography at d13, pressure volume curves at d30, and exercise swim testing and arterial blood gases at both d15 and d30. Results Dex-treated animals had simplified lung architecture without secondary septation. Animals given RA alone had smaller, more numerous alveoli. Concomitant treatment with Dex + RA prevented the Dex-induced changes in septation. While the results of exposure to Dex + RA were sustained, the effects of RA alone were reversed two weeks after treatment was stopped. At d13, Dex-treated animals had increased lung volume, respiratory rate, tidal volume, and minute ventilation. On d15, both RA- and Dex-treated animals had hypercarbia and low arterial pH. By d30, the RA-treated animals resolved this respiratory acidosis, but Dex-treated animals continued to demonstrate blood gas and lung volume abnormalities. Concomitant RA treatment improved respiratory acidosis, but failed to normalize Dex-induced changes in pulmonary function and lung volumes. No differences in exercise tolerance were noted at either d15 or d30. RA treatment after the period of alveolarization also corrected the effects of earlier Dex exposure, but the structural changes due to RA alone were again lost two weeks after treatment. Conclusion We conclude that both RA- and corticosteroid-treatments are associated with respiratory acidosis at d15. While RA alone-induced changes in structure andrespiratory function are reversed, Dex-treated animals continue to demonstrate increased respiratory rate, minute ventilation, tidal and total lung volumes at d30. Concomitant treatment with Dex + RA prevents decreased septation induced by Dex alone and results in correction of hypercarbia. However, these animals continue to have abnormal pulmonary function and lung volumes. Increased septation as a result of RA treatment alone is reversed upon discontinuation of treatment. These data suggest that Dex + RA treatment results in improved gas exchange likely secondary to normalized septation.