In mammals, the gonads arise as bipotential primordia that are capable of developing as either testes or ovaries. Expression of the Y-linked gene Sry in the XY gonad initiates testis differentiation; in the absence of Sry, ovarian pathways prevail. Although the molecular targets of SRY are not known, many of the early cellular and morphological events that occur downstream of Sry have been characterized. These include increased cell proliferation, Sertoli cell differentiation, testis cord formation, development of a testis-specific vasculature and differentiation of interstitial lineages. Recently, several of the molecular signals that direct these processes have been identified. In addition, the pathways that suppress features of testis development in the XX gonad are being elucidated.