Follicle development in the mammalian ovary requires interactions among the oocyte, granulosa cells, and theca cells, coordinating gametogenesis and steroidogenesis. Here we show that granulosa cells of growing follicles in mouse ovary act as a source of hedgehog signaling. Expression of Indian hedgehog and desert hedgehog mRNAs initiates in granulosa cells at the primary follicle stage, and we find induced expression of the hedgehog target genes Ptch1 and Gli1, in the surrounding pre-theca cell compartment. Cyclopamine, a highly specific hedgehog signaling antagonist, inhibits this induced expression of target genes in cultured neonatal mouse ovaries. The theca cell compartment remains a target of hedgehog signaling throughout follicle development, showing induced expression of the hedgehog target genes Ptch1, Ptch2, Hip1, and Gli1. In periovulatory follicles, a dynamic synchrony between loss of hedgehog expression and loss of induced target gene expression is observed. Oocytes are unable to respond to hedgehog because they lack expression of the essential signal transducer Smo (smoothened). The present results point to a prominent role of hedgehog signaling in the communication between granulosa cells and developing theca cells.