Mutations of the DAX1 nuclear receptor gene cause adrenal hypoplasia congenita, an X-linked disorder characterized by adrenal insufficiency and hypogonadotropic hypogonadism. Targeted deletion of Dax1 in mice also reveals primary testicular dysgenesis, which is manifest by obstruction of the rete testis by Sertoli cells and hyperplastic Leydig cells, leading to seminiferous tubule dilation and degeneration of germ cells. Because Dax1 is expressed early in gonadal development, and because Sertoli and Leydig cells are located ectopically in the adult, we hypothesized that these testis abnormalities are the result of an early defect in testis development. In Dax1(-/Y) males, the gonad develops normally until 12.5 dpc. However, by 13.5 dpc, the testis cords are disorganized and incompletely formed in Dax1-deficient mice. The number of germ and Sertoli cells is unchanged, and the expression of Sertoli-specific markers appears to be normal. However, the number of peritubular myoid cells, which normally surround the testis cords, is reduced. BrdU labeling of peritubular myoid cells is low, consistent with decreased proliferation. The basal lamina produced by peritubular myoid and Sertoli cells is disrupted, leading to open and incompletely formed testis cords. Leydig cells, which normally reside in the peritubular space and extend from the coelomic surface to the dorsal surface of the gonad, are restricted to the coelomic surface of Dax1-deficient testis. We conclude that Dax1 plays a crucial role in testis differentiation by regulating the development of peritubular myoid cells and the formation of intact testis cords. The developmental abnormalities in the Dax1-deficient testis lay the foundation for gonadal dysgenesis and infertility in adult mice and, potentially in humans with DAX1 mutations.