Positive end expiratory pressure (PEEP) is an accepted treatment for children with acute respiratory failure secondary to restrictive lung diseases. Using a simple technique based on open circuit nitrogen washout, we determined the functional residual capacity (FRC) in 25 ventilated children (age 3 wk-10 y) with acute respiratory failure secondary to restrictive lung disease (pulmonary edema, bilateral pneumonia). FRC measured at a physiologic level of PEEP (2-4 cm H2O) was 45.0 ± 3.6% (mean ± SEM; range 12-80%) lower than normal predicted values. At the PEEP level chosen clinically (4-10 cm H2O, mean = 6.0), the FRC was below normal predicted values for nonintubated children by a mean of 31.8% (range 0-73%) (p = 0.0001) and only seven patients (28%) had FRC within 20% below predicted normal values. FRC normalized at PEEP levels of 6-18 cm H2O (mean = 11.6), which was up to 200% above the clinically chosen PEEP level. In six children without lung disease who were ventilated at a PEEP level of 2-4 cm H2O, the FRC was within normal range in two, but significantly higher (by 45%) in the other four. We conclude that FRC in ventilated children with acute restrictive lung disease is significantly lower than normal and the clinically chosen PEEP fails to normalize the FRC in most of the cases.