This research establishes why the U.S. military’s policies barring transgender service members are outdated and out of synch with the values of diversity and inclusiveness. Just as racism is grounded upon incorrect assumptions about racial characteristics, transgender discrimination is based upon false assumptions about sex and gender. This paper specifically examines the policy implications in recruiting individuals who identify as transgender and integrating transgender service members who seek to come out and transition to their true genders. It provides key definitions regarding sex and gender identity in order to better understand the challenges of integration. Finally, it provides recommendations for policy changes affecting Military Equal Opportunity, privacy rights, personnel management, substance abuse detection programs, health care, facilities usage, billeting, and physical fitness and body fat composition programs, to allow for the out service of all members of the LGBT community.