Formation of a theca cell (TC) layer is an important physiologic event that occurs during early follicular development. Nevertheless, little is known concerning the nature and regulation of the formation of the TC layer during follicular growth. Using an established coculture system in this study, we examined the hypothesis that stromal cells differentiate into TCs during early follicular development and that this process involves interaction with granulosa cells (GCs). Ovarian stromal cells from the bovine ovarian cortex (S(C)) and medulla (S(M)) were cultured with or without GCs from small antral follicles. The presence of GCs increased the number of lipid droplets and mitochondria, and it stimulated androstenedione production in S(C) and S(M). However, luteinizing hormone/choriogonadotropin receptor (LHCGR) mRNA abundance and hCG-induced cAMP and androstenedione production were increased in S(C) but not in S(M) by the presence of GCs. The present results indicate that GCs are involved in the functional differentiation and the acquisition of LH responsiveness in stromal cells of the ovarian cortex. We suggest that GC-S(C) interaction is important in the formation of the TC layer during early follicular development, although the nature of this interaction remains to be determined.