Morphologic development of the granulosa cell and the capacity for estrogen biosynthesis were evaluated in ovaries from New Zealand white rabbit fetuses at 16, 17, 18, 19, 20, 24 and 28 days of gestation. By light microscopy, granulosa cells within the developing cortical cords showed extensive accumulation of lipid material in their cytoplasm at Days 18, 19 and 20. Electron microscopy confirmed the presence of abundant lipid in granulosa cells at these times and showed that lipid is present in cytoplasmic droplets, often in coalescent aggregates. Quantitative morphometric examination demonstrated a sixfold increase in lipid between Days 16 and 19 and a subsequent decrease to earlier values by Day 24. In parallel studies, estrogen formation from [1 beta-3H]testosterone was low in Days 17 and 18 ovaries, increased approximately sixfold by Day 20 and fell by Day 24. Thus, the capacity of granulosa cells of the fetal ovary to form estradiol correlates with their cytoplasmic lipid content.