Steroid sex hormones have an organisational role in the development of brain mechanisms underlying gender-specific behaviour. Although peaks in gonadal androgen occur at developmental stages that coincide with sensitive periods for the differentiation of both structural sex differences in the brain and sexual behaviour, the factors that control the phasic effects of steroids are still not understood. Aromatase, converting androgen to oestrogen, is a key enzyme in development, and regulation of the activity of this enzyme is likely to be one of the factors determining availability of oestrogen effective for brain differentiation. Measurement of testosterone metabolism in vitro shows that in the mouse oestrogens are formed actively in the neonatal brain during male development. In cultured cells of the embryonic mouse hypothalamus there are sex differences in hypothalamic aromatase activity both during early embryonic and later perinatal development, with a higher capacity for oestrogen formation in the male than in the female. The sex differences are regionally specific, since no differences in aromatase activity are detectable in cultured cortical cells between male and female. Aromatase activity is neuronal rather than astroglial. Using a specific antibody to the mouse aromatase, immunoreactivity is also restricted to neuronal soma and neurites in hypothalamic cultures. Therefore, gender-specific differences in aromatase regulation are probably restricted to neurons. Testosterone increases oestrogen formation specifically in cultured hypothalamic neurones, but has no effect on cortical cells. Although there is a sex difference in early embryonic neuronal aromatase, aromatase activity appears to be sensitive to androgen only in later embryonic development. What determines the phasic sensitivity of the developing brain aromatase system to androgen has still to be determined.