Studies from multiple species, including humans, suggest that gonadal hormones, and ovarian hormones in particular, influence the physiology of sleep, but the mechanisms by which these hormones influence sleep behaviors are unknown. Previously, we demonstrated a 50% reduction in lipocalin-prostaglandin D synthase (L-PGDS) transcript levels, following estradiol treatment, at the level of the ventrolateral preoptic area (VLPO), a putative sleep-active nucleus. Catalytic activity of L-PGDS produces prostaglandin D2 (PGD2), an endogenous somnogen. Based on our previous studies, we hypothesized that estradiol is acting via PGD2 to suppress neuronal activity in the VLPO of females. To begin to test whether this is true, we quantified the number of Fos-immunopositive cells in hormonally manipulated male and female rats. We found that in females during the light phase, estradiol suppressed Fos expression in VLPO neurons. Interestingly, protein expression of L-PGDS followed the same pattern. Surprisingly, changes in the hormonal milieu of males had no effect. Using telemetry to record electroencephalograms from gonadally intact females, we found, in the light phase of proestrus when estradiol levels are high, a marked reduction in rapid eye movement (REM) sleep compared with the other days of the estrous cycle. However, during the dark phase of proestrus when estrogen and progesterone levels are elevated, significantly less time was spent in both non-REM and REM sleep. Thus, it seems that hormones in females play a major role in the regulation of sleep and arousal via activation of neurons in key sleep and arousal centers.