Step 1: Understanding the Concept:
The early embryo is sexually undifferentiated and possesses both Wolffian (mesonephric) and M\"ullerian (paramesonephric) ducts.
Sexual differentiation depends on the presence or absence of testicular hormones, which determine which duct system persists.
Detailed Explanation:
Statement I:
In the sexually indifferent embryo, both duct systems coexist regardless of genetic sex.
Later, in males, testosterone maintains the Wolffian ducts while Anti-M\"ullerian Hormone (AMH) causes regression of the M\"ullerian ducts.
In females, the absence of these hormones allows the M\"ullerian ducts to develop.
Therefore, Statement I is true.
Statement II:
The M\"ullerian ducts give rise to the principal female reproductive tract, including the fallopian tubes, uterus, cervix, and the upper two-thirds of the vagina.
The lower one-third of the vagina develops from the urogenital sinus.
Hence, Statement II is true.
Step 2: Final Answer:
Both Statement I and Statement II are true.
\[
\boxed{(A) Both Statement I and Statement II are true.
\]