Differentiating embryonic stem cells (ESCs) can form ovarian follicle-like structures in vitro, consisting of an oocyte-like cell surrounded by somatic cells capable of steroidogenesis. Using a dual-fluorescence reporter system in which mouse ESCs express green fluorescent protein (GFP) under the control of a germ cell-specific Pou5f1 gene promoter and red fluorescent protein (Discosoma sp red [DsRed]) driven by the granulosa cell-specific Forkhead box L2 (Foxl2) gene promoter, we first confirmed in vitro formation of follicle-like structures containing GFP-positive cells surrounded by DsRed-positive cells. Isolated DsRed-positive cells specified from ECSs exhibited a gene expression profile consistent with granulosa cells, as revealed by the detection of messenger RNAs (mRNAs) for Foxl2, follistatin (Fst), anti-Müllerian hormone (Amh), and follicle-stimulating hormone receptor (Fshr) as well as by production of both progesterone and estradiol. In addition, treatment of isolated DsRed-expressing cells with follicle-stimulating hormone (FSH) significantly increased estradiol production over basal levels, confirming the presence of functional FSH receptors in these cells. Last, ESC-derived DsRed-positive cells injected into neonatal mouse ovaries became incorporated within the granulosa cell layer of immature follicles. These studies demonstrate that Foxl2-expressing ovarian somatic cells derived in vitro from differentiating ESCs express granulosa cell markers, actively associate with germ cells in vitro, synthesize steroids, respond to FSH, and participate in folliculogenesis in vivo.