Global atmospheric CO2 is increasing at a rate of 1.5–2 ppm per year and is predicted to double by the end of the next century. Understanding how terrestrial ecosystems will respond in this changing environment is an important goal of current research. Here we present results from a field study of elevated CO2 in a California annual grassland. Elevated CO2 led to lower leaf-level stomatal conductance and transpiration (approximately 50%) and higher mid-day leaf water potentials (30–35%) in the most abundant species of the grassland, Avena barbata Brot. Higher CO2 concentrations also resulted in greater midday photosynthetic rates (70% on average). The effects of CO2 on stomatal conductance and leaf water potential decreased towards the end of the growing season, when Avena began to show signs of senescence. Water-use efficiency was approximately doubled in elevated CO2, as estimated by instantaneous gas-exchange measurements and seasonal carbon isotope discrimination. Increases in CO2 and photosynthesis resulted in more seeds per plant (30%) and taller and heavier plants (27% and 41%, respectively). Elevated CO2 also reduced seed N concentrations (9%).