In Drosophila, the sex of germ cells is determined by cell-autonomous and inductive signals. XY germ cells autonomously enter spermatogenesis when developing in a female host. In contrast, XX germ cells non-autonomously become spermatogenic when developing in a male host. In first instar larvae with two X chromosomes, XX germ cells enter the female or the male pathway depending on the presence or absence of transformer (tra) activity in the surrounding soma. In somatic cells, the product of tra regulates the expression of the gene double sex (dsx) which can form a male-specific or a female-specific product. In dsx mutant larvae, XX and XY germ cells develop abnormally, with a seemingly intersexual phenotype. This indicates that female-specific somatic dsx products feminize XX germ cells, and male-specific somatic dsx products masculinize XX and XY germ cells. The results show that tra and dsx control early inductive signals that determine the sex of XX germ cells and that somatic signals also affect the development of XY germ cells. XX germ cells that develop in pseudomales lacking the sex-determining function of Sxl are spermatogenic. If, however, female-specific tra functions are expressed in these animals, XX germ cells become oogenic. Furthermore, transplanted XX germ cells can become oogenic and form eggs in XY animals that express the female-specific function of tra. Therefore, TRA product present in somatic cells of XY animals or in animals lacking the sex-determining function of Sxl, is sufficient to support developing XX germ cells through oogenesis.