Onychophora or velvet worms are of considerable importance in current reconstructions of animal phylogeny. Despite their otherwise conservative morphology, the detailed anatomy of the onychophoran ovary displays significant variation. However, the evolutionary significance of this variation is not well understood. We recognize three major ovarian types in the Onychophora: (1) the exogenous ovary; (2) the pseudoendogenous ovary; and (3) the endogenous ovary. The germ cells in all three ovarian types are intraepithelial in that they occur between the basal lamina and the epithelial cells that line the cavity of the gonad. This is the condition found in the endogenous ovary. Even in the exogenous ovary, with stalked oocytes projecting into the haemocoel, the maturating oocytes are still covered by a basal lamina. Stalked oocytes that are similar to those found in the exogenous ovary, but retain their intra-ovarian position, characterize the pseudoendogenous ovary. This and additional observations support the assumption that the pseudoendogenous ovary is derived from an exogenous type and the similarities with the endogenous ovary are superficial. Embryological data and an outgroup comparison with arthropods suggest that the exogenous ovary is the ancestral condition in velvet worms and a synapomorphy of Onychophora and Arthropoda. The embryonic origin, growth, and position of oocytes outside the ovarian lumen in Onychophora and various groups of Arthropoda do not support the Articulata hypothesis, which proposes a sister-group relationship of Panarthropoda and Annelida.