Our aim was to determine if the effect of cortisol on alveolar epithelial cell (AEC) phenotypes in the fetus is mediated via a sustained alteration in lung expansion. Chronically catheterized fetal sheep were exposed to either: (1) saline infusion, (2) cortisol infusion (122-131d; 1.5-4.0 mg/day), (3) saline infusion plus reduced lung expansion, or (4) cortisol infusion plus reduced lung expansion. The proportions of type-I and type-II AECs were determined using electron microscopy and SP-A, -B and -C mRNA levels were determined by Northern blot analysis. Cortisol infusions significantly increased type-II AEC proportions (to 38.2 ± 2.2%), compared with saline-infused fetuses (23.8 ± 2.4%), and reduced type-I AEC proportions (to 59.0 ± 2.2%), compared with saline-infused fetuses (70.4 ± 2.4%). Reduced lung expansion also increased type-II AEC proportions (to 52.9 ± 3.5%) and decreased type-I AEC proportions (to 34.2 ± 3.7%), compared with control, saline-infused fetuses. The infusion of cortisol into fetuses exposed to reduced lung expansion tended to further increase type-II (to 60.3 ± 2.1%; p=0.066) and reduce type-I AEC (to 26.6 ± 2.3%; p=0.07) proportions. SP-A, -B and -C mRNA levels changed in parallel with the changes in type-II AEC proportions. These results indicate that cortisol alters the proportion of type-I and type-II AECs via a mechanism that is unrelated to the degree of fetal lung expansion. However, reductions in fetal lung expansion appear to have a greater impact on the proportion of AECs than cortisol.