The vertebrae notochord is a transient rod-like structure that produces secreted factors that are responsible for patterning surrounding tissues. During later mouse embryogenesis, the notochord gives rise to the middle part of the intervertebral disc, called the nucleus pulposus. Currently, very little is known about the molecular mechanisms responsible for forming the intervertebral discs. Here we demonstrate that hedgehog signaling is required for formation of the intervertebral discs. Removal of hedgehog signaling in the notochord and nearby floorplate resulted in the formation of an aberrant notochord sheath that normally surrounds this structure. In the absence of the notochord sheath, small nuclei pulposi were formed, with most notochord cells dispersed throughout the vertebral bodies during embryogenesis. Our data suggest that the formation of the notochord sheath requires hedgehog signaling and that the sheath is essential for maintaining the rod-like structure of the notochord during early embryonic development. As notochord cells form nuclei pulposi, we propose that the notochord sheath functions as a “wrapper” around the notochord to constrain these cells along the vertebral column.