We have previously shown that fetal mouse ovaries develop testicular structures after transplantation into adult male mice. The mechanisms of gonadal sex reversal is poorly understood. In the present study, we examined how a host environment is involved in the induction of testicular development in ovarian grafts. Fetal ovaries on the twelfth day of gestation were microencapsulated with semipermeable membranes, transplanted beneath the kidney capsules of adult male mice, and fixed for histological examinations between the sixteenth and twenty-second day after transplantation. Fifteen of forty-seven ovarian grafts were found to be completely enclosed in microcapsules, whereas the microcapsule membranes of other grafts were partly broken or had been lost. These differences of microencapsulation conditions made it possible to study the role of host factors in gonadal sex reversal. All ovarian grafts surrounded by microcapsule membranes developed ovarian structures. In contrast, most ovarian grafts which had lost the microcapsules developed testicular structures in addition to ovarian structures. When ovarian grafts were partially enclosed in microcapsule membranes, testicular structures developed only in the area in contract with the host kidney. These results suggest that direct interaction between the ovarian graft and cells or large macromolecules from the host is involved in the development of testicular structures in ovarian grafts.