The proper function of the craniofacial skeleton requires the proper shaping of many individual skeletal elements. Neural crest cells generate much of the craniofacial skeleton and morphogenesis of skeletal elements occurs in transient, reiterated structures termed pharyngeal arches. The shape of individual elements depends upon intrinsic patterning within the neural crest as well as extrinsic signals to the neural crest from adjacent tissues within the arches. Hedgehog (Hh) signaling is known to play roles in craniofacial development, yet its involvement in intrinsic and extrinsic patterning of the craniofacial skeleton is still not well understood. Here, we show that morphogenetic movements of the pharyngeal arches and patterning of the neural crest require Hh signaling. Loss of Hh signaling, in smoothened (smo) mutants, disrupts the expression of some Dlx genes as well as other markers of dorsal/ventral patterning of the neural crest. Transplantation of wild-type neural crest cells into smo mutants rescues this defect, demonstrating that the neural crest requires reception of Hh signals for proper patterning. Despite the rescue, morphogenesis of the facial skeleton is not fully recovered. Through transplant analyses, we find two additional requirements for Hh signaling. The endoderm requires the reception of Hh signals for proper morphogenetic movements of the pharyngeal arches and the neural crest require the reception of Hh signaling for the activity of a reverse signal that maintains sonic hedgehog expression in the endoderm. Collectively, these results demonstrate that Hh signaling is essential to establish intrinsic and extrinsic patterning information for the craniofacial skeleton.