The expression of Sry in the undifferentiated, bipotential genital ridges of mammalian XY fetuses initiates testis development and is hypothesized to do so by directing supporting cell precursors to develop as Sertoli cells and not as granulosa cells. To directly test this hypothesis, transgenic mice expressing EGFP under the control of the Sry promoter were produced. After establishing that the transgene was expressed in fetal gonads similarly to endogenous Sry, the spatial and temporal expression of the Sry-EGFP transgene was investigated in developing gonads by using confocal microscopy and immunofluorescent histochemistry. This analysis indicated: (1) Sry is first expressed in cells located centrally in the genital ridge and then later in cells located at the cranial and caudal poles, (2) Sry is expressed exclusively in pre-Sertoli cells in the urogenital ridge, and (3) Sertoli and granulosa cells develop from a common precursor. These results support the hypothesis that Sry initiates testis differentiation by directing the development of supporting cell precursors as Sertoli rather than granulosa cells. Furthermore, the Sry expression pattern explains the nonrandom distribution of testicular and ovarian tissue in mammalian ovotestes.