A method has been developed for on-line breath-by-breath calculation of alveolar gas exchange by correcting the gas exchange measured at the mouth for changes in lung gas stores. The corrections are applied to the total lung gas exchange, which is found by directly subtracting expired from inspired volume of each gas. Corrections are made for both breath-to-breath changes in lung volumes and changes in alveolar gas concentrations. The lung volume correction term has the effect of reducing the large error sensitivity of O2 exchange that has, in the past, resulted from direct determination by total lung gas exchange. Error each gas. Corrections are made for both breath-to-breath changes in lung volumes and changes in alveolar gas concentrations. The lung volume correction term has the effect of reducing the large error sensitivity of O2 exchange that has, in the past, resulted from direct determination by total lung gas exchange. Error each gas. Corrections are made for both breath-to-breath changes in lung volumes and changes in alveolar gas concentrations. The lung volume correction term has the effect of reducing the large error sensitivity of O2 exchange that has, in the past, resulted from direct determination by total lung gas exchange. Error sensitivity analysis shows that the effect of inaccuracies due to errors in measuring gas flow or gas concentrations are similar in magnitude to those in the open-circuit method that has traditionally been used. The algorithm for alveolar gas exchange has been implemented in a computer program for on-line respiratory analysis alongside the open-circuit calculation of gas exchange at the mouth that has been used in out laboratory. By use of several experimental studies, it is shown that there are very apparent breath-to-breath differences between the gas exchange measured by the two methods. During metabolic and respiratory transients, these differences often have significant influence on interpretation of the underlying physiology.