The Hedgehog (Hh) gene family encodes a group of secreted signaling molecules that are essential for growth and patterning of many different body parts of vertebrate and invertebrate embryos (1). Depending on the context, Hh signals can promote cell proliferation, prevent apoptosis, or induce specific cell fates. Hh family members can exert their effects not only on cells neighboring the source of the signal, but also over considerable distances (up to 30-cell diameters), acting in at least some cases as classic morphogens. Such morphogens are signaling molecules that diffuse from a source to form a concentration gradient over an extended area of the target field and elicit different responses from cells according to their position within the gradient, which in turn reflects the dosage of the ligand they are exposed to. In the fruit fly Drosophila, Hh patterns the embryonic ectoderm via short-range interactions with other signaling molecules (2). On the other hand, it employs two different strategies in larval wing imaginal discs: it induces a secondary signal (Decapentaplegic [Dpp]) locally, which then acts at a long range; and Hh itself diffuses over several cell diameters and acts as a morphogen (3–5). Unlike Drosophila, which has one member of the Hh family, mice have three — Sonic hedgehog (Shh), Indian hedgehog (Ihh), and Desert hedgehog (Dhh) — with Shh being the best studied (Table (Table1).1). Shh is expressed at the ventral end of the neural tube (floor plate) and underlying notochord, and patterns the neural tube along its dorsoventral axis (6). Several pieces of evidence support the notion that this patterning is mediated by a direct morphogen activity of Shh. In vitro assays using undifferentiated neural tube explants demonstrate that different dosages of Shh can induce different cell types, where the relative dosages required to induce certain cell fates are consistent with their positions within the concentration gradient in vivo (7, 8). More recently, it has become possible to visualize the endogenous Shh gradient covering the ventral half of the neural tube by immunofluorescence and immunohistochemistry (9, 10). In addition, the cell-autonomous activation or inactivation of the pathway using mutant forms of receptor components results in autonomous changes of cell fates, confirming the direct role of Hh signaling (11, 12). The limb is another place where Shh may function as a morphogen. Shh is expressed in the posterior distal mesenchyme of the limb bud, called the zone of polarizing activity (ZPA), and makes a long-range gradient along the anteroposterior axis (13, 14). This concentration gradient is believed to be important in specifying digit identities across the limb bud, with high dosages of Shh close to the ZPA inducing posterior digits and low dosages inducing anterior digits (13, 15, 16). In addition to its importance during development, inappropriate activation of the Hh pathway has been implicated in human tumors such as basal cell carcinoma, medulloblastoma, fibrosarcoma, and rhabdomyosarcoma (17). Table 1 Mammalian Hh genes: some of their normal roles and pathological associations Not surprisingly, significant effort has been devoted to uncovering the molecular mechanism of this pathway (1). Genetic and biochemical studies have established the current model in which Hh receptor Patched (Ptc) is a negative regulator of the pathway repressing the downstream activator Smoothened (Smo), and binding of Hh to Ptc abrogates this inhibition, leading to cellular responses via specific transcription factors known in the fly as Ci and in the mouse as Gli. During the past decade, much excitement has been generated by the discovery of the unusual posttranslational modifications that the Hh protein undergoes (18): the addition of cholesterol (19), which is unprecedented, and palmitoylation (20), which is normally found in cytoplasmic proteins. Here, we will review our current understanding of the mechanism and biological relevance of the cholesterol modification of Hh, with additional discussion of the role of palmitoylation, which has come to light more recently.