The developing central nervous system of the fetus and neonate are recognized as very sensitive to maternal or gestational hypothyroidism. Despite this recognition, there is still a lack of data concerning the relationship between thyroid-related biomarkers and neurological outcomes. We used propylthiouracil (PTU) administered at 0, 3, or 10 ppm in drinking water from gestational day 2 until weaning to create hypothyroid conditions to study the relationship between HPT axis compensation and impaired neurodevelopment. In addition to serum T3, T4, free T4, and TSH concentrations, cerebrocortical T3 concentration (cT3), hepatic Type I (D1) and cerebrocortical Type II (D2) 5'-deiodinase activity, and thyroidal mRNA for thyroglobulin (Tg) and sodium iodide symporter (NIS) were measured. Extracellular recordings from the CA1 region in hippocampal slices were obtained from both PND 21–32 (pups) and PND90–100 (adults) rats to assess neurophysiological effects. Thyroidal mRNA for Tg and NIS were increased in pups, but not in dams. Both PTU doses increased cerebrocortical D2 activity 5-fold in pups, but only 10 ppm increased D2 activity in dams. In dams, cT3 concentrations were maintained at 3 ppm, but fell 75% at 10 ppm. cT3 concentration in pups fell 50% at 3 ppm, and over 90% at 10 ppm. In both 3 and 10 ppm pups, hippocampal baseline synaptic activity correlated negatively with cerebrocortical D2 activity. In 3 ppm adults, impaired long-term potentiation was evident. In summary, during depletion of serum T4, D2 activity served as a sensitive marker of tissue thyroid status, an indicator of the brain's compensatory response to maintain cT3, and correlated with a neurophysiological outcome.