Since my post yesterday was a bit rambling, here's a capsule summary. In short, the district court's opinion indicates that:
1) Discrimination against transgender applicants/employees can fall within the Price Waterhouse sex stereotyping theory
2) Employers cannot treat individuals as "dishonest" simply by virtue of their expressing a gender that does not match their birth sex.
3) Employers cannot expect individuals to affirmatively disclose that they are transgender.
4) However, it may be permissible to reject an individual if the employer believes in good faith that an individual has attempted to mislead the employer about his/her gender/birth sex, and draws an inference therefrom about their person's honesty.
Point (4), which I believe to be incorrect, was left open but not squarely adopted by the court. Even if that theory of defense is acceptable, the evidence doesn't look good for this employer. More generally, trying is defense could be messy and create more risk than employers would generally wish to tolerate. Employers would be wise, then, to treat this sort of personal information, and any employee statements or non-statements about it, as irrelevant to employment.
Arthur Leonard also has a very smart post about the decision here.
The case is Lopez v. River Oaks Imaging & Diagnostic Group, Inc., 2008 Westlaw 902937 (S.D. Tex., Houston Div., Apr. 3, 2008).