The effect of a 20 s sustained inflation (SI) and positive end-expiratory pressure (PEEP) on functional residual capacity (FRC) formation at birth were investigated. Preterm rabbit pups (28 d) were randomized at birth into four groups (n = 6 for each): 1) SI, PEEP 5 cm H2O, 2) no SI, PEEP 5 cm H2O, 3) no SI + no PEEP, 4) SI + no PEEP. FRC and tidal volume (Vt) were measured by plethysmography and uniformity of lung aeration by phase contrast x-ray imaging. Ventilation with a SI and PEEP uniformly aerated the lung and Vt and FRC were recruited by the first tidal inflation. Ventilation without a SI, with PEEP, gradually recruited Vt and FRC with each inflation but aeration was not uniform. Ventilation without a SI or PEEP, gradually recruited Vt, but no FRC. Ventilation with a SI, without PEEP, uniformly aerated the lung and recruited Vt but no FRC. FRC was greater with SI (p = 0.006) during the first minute, but was larger with PEEP than without PEEP throughout the first 7 min (p < 0.0005). Effects of PEEP and SI were additive. In ventilated preterm rabbits at birth, combining a SI and PEEP improved FRC formation and uniformity of lung aeration, but PEEP had the greatest influence.