1. Both the neuroendocrine system and the brain mechanisms underlying gender-specific behavior are known to be organized by steroid sex hormones, androgen and estrogen, during specific sensitive phases of early fetal and perinatal development. The factors that control these phasic effects of the hormones on brain development are still not understood. Processes of masculinization and defeminization are thought to be involved in the sex differentiation of mammalian reproductive behavior. 2. The P450 aromatase, converting androgen to estrogen, is a key enzyme in the development of neural systems, and the activity of this enzyme is likely to be one of the factors determining brain sex differentiation. 3. We have examined the localization and regulation of brain aromatase using the mouse as a model. Measurement of testosterone conversion to estradiol-17 beta, using a sensitive radiometric 3H2O assay, indicates that estrogens are formed more actively in the male mouse brain than in the female during both the prenatal and the neonatal periods. In primary cell cultures of embryonic mouse hypothalamus there are sex differences in aromatase activity during early and late embryogenesis, with a higher capacity for estrogen formation in the male than the female. These sex differences are regionally specific in the brain, since on gender differences in aromatase activity are detectable in cortical cells. 4. Aromatase activity in the mouse brain is neuronal rather than glial. Using a specific antibody to the mouse aromatase, immunoreactivity is restricted to neuronal soma and neurites in hypothalamic cultures. There are more neurons containing expressed aromatase in the male hypothalamus than in the female. Therefore, gender-specific differences in embryonic aromatase activity are neuronal. 5. Testosterone increases aromatase activity specifically in hypothalamic neurons, but has no effect on cortical cells. The neuronal aromatase activity appears to be sensitive to the inductive effects of androgen only in the later stages of embryonic development. Androgen also increases the numbers of aromatase-immunoreactive neurons in the hypothalamus. 6. This work suggests that the embryonic male hypothalamus and other androgen target areas contain a network of neurons which has the capacity to provide estrogen for the sexual differentiation of brain mechanisms of behavior. The phasic activity of the key enzyme, aromatase, during development is influenced by androgen. What determines the developmental action of androgen and the other factors involved in the regulation and expression of this neuronal enzyme still have to be established.