The literature dealing with the magnitude, mechanism and effects of reduced FRC in the perioperative period is reviewed. During general anaesthesia FRC is reduced by approximately 20%. The reduction is greater in the obese and in patients with COPD. The most likely mechanism is the loss of inspiratory muscle tone of the muscles acting on the rib cage. Gas trapping is an additional mechanism. Lung compliance decreases and airways resistance increases, in large part, due to decreased FRC. The larynx is displaced anteriorly and elongated, making laryngoscopy and intubation more difficult. The change in FRC creates or increases intrapulmonary shunt and areas of low ventilation to perfusion. This is due to the occurrence of compression atelectasis, and to regional changes in mechanics and airway closure which tend to reduce ventilation to dependent lung zones which are still well perfused. Abdominal and thoracic operations tend to increase shunting further. Large tidal volume but not PEEP will improve oxygenation, although both increase FRC. Both FRC and vital capacity are reduced following abdominal and thoracic surgery in a predictable pattern. The mechanism is the combined effect of incisional pain and reflex dysfunction of the diaphragm. Additional effects of thoracic surgery include pleural effusion, cooling of the phrenic nerve and mediastinal widening. Postoperative hypoxaemia is a function of reduced FRC and airway closure. There is no real difference among the various methods of active lung expansion in terms of the speed of restoration of lung function, or in preventing postoperative atelectasis/pneumonia. Epidural analgesia does not influence the rate of recovery of lung function, nor does it prevent atelectasis/pneumonia.