Desert hedgehog (Dhh) is a cell-signaling molecule that was first discovered in Drosophila. A unique testicular phenotype has been described in neonatal and adult Dhh-null animals that includes anastomotic seminiferous tubules, pertitubular cell abnormalities, and absence of adult-type Leydig cells. In the present study, we addressed the developmental basis for the abnormalities previously described for the adult Dhh-null phenotype. The source of Dhh is the Sertoli cell, and receptors are localized on peritubular cells and possibly Leydig cells. The development of testes from Dhh-null mouse embryos was studied using light and electron microscopy at 11.5, 12.5, 13.5, and 16.5 days postcoitum (dpc) and was compared with that in control Dhh heterozygous and wild-type embryos. Dhh-null and control testes were generally similar during the period of early cord formation (11.5–12.5 dpc). By 13.5 dpc, the basal lamina delimiting the cords was lacking in some regions and disorganized in Dhh-null testes, and occasional germ cells were seen outside cords. At 16.5 dpc, these defects were more prominent and cord organization was less well defined than in controls. In addition, there were numerous extracordal germ cells, some of which were partially enclosed by a somatic cell of unknown identity. Numerous fibroblast-like cells, apparently secreting collagen and basal lamina, characterized the interstitium of the Dhh-null testis. These defects likely stem from abnormal peritubular stimulation due to the lack of Dhh, leading to the abnormalities seen in the developmental stages studied here and in the adult testis.