Hedgehog (Hh) signaling plays multiple roles in the development of the anterior craniofacial skeleton. We show that the earliest function of Hh is indirect, regulating development of the stomodeum, or oral ectoderm. A subset of post-migratory neural crest cells, that gives rise to the cartilages of the anterior neurocranium and the pterygoid process of the palatoquadrate in the upper jaw, condenses upon the upper or roof layer of the stomodeal ectoderm in the first pharyngeal arch. We observe that in mutants for the Hh co-receptor smoothened (smo) the condensation of this specific subset of crest cells fails, and expression of several genes is lost in the stomodeal ectoderm. Genetic mosaic analyses with smo mutants show that for the crest cells to condense the crucial target tissue receiving the Hh signal is the stomodeum, not the crest. Blocking signaling with cyclopamine reveals that the crucial stage, for both crest condensation and stomodeal marker expression, is at the end of gastrulation--some eight to ten hours before crest cells migrate to associate with the stomodeum. Two Hh genes, shh and twhh, are expressed in midline tissue at this stage, and we show using mosaics that for condensation and skeletogenesis only the ventral brain primordium, and not the prechordal plate, is an important Hh source. Thus, we propose that Hh signaling from the brain primordium is required for proper specification of the stomodeum and the stomodeum, in turn, promotes condensation of a subset of neural crest cells that will form the anterior neurocranial and upper jaw cartilage.