FSH plays a crucial role in granulosa cell differentiation and follicular development during the ovulation cycle. The early events of granulosa cell differentiation in cell culture involve changes in the cell morphology and cell-to-cell interactions. To determine the cause and signaling mechanism for these changes, we examined an undifferentiated rat ovarian granulosa cell line that grows in a defined serum-free medium, expresses the FSH receptor, terminally differentiates when exposed to FSH, and undergoes apoptosis upon FSH withdrawal. FSH bound the FSH receptor on rat ovarian granulosa cells, and the liganded receptor activated adenylyl cyclase (AC) to produce cAMP but did not mobilize Ca2+. In addition, we observed massive reorganization of the actin cytoskeleton within 3 h of FSH treatment. This involves formation of lamellipodia and filopodia and spreading of multilayer cell aggregates to monolayers. This actin reorganization and cell transformation could also be induced by the AC activator, forskolin, in the absence of FSH. Furthermore, AC inhibitors blocked the FSH-dependent actin reorganization and transformation. On the other hand, phospholipase C inhibitors did not block the FSH-induced changes. Taken together, our observations indicate that the AC/cAMP signal is necessary and sufficient for FSH-dependent granulosa cell differentiation, including massive reorganization of the actin cytoskeleton and changes in the cell morphology and cell-to-cell interactions. There is no evidence that the phospholipase C signal and Ca2+ mobilization are involved in this process.