Extracellular signaling proteins encoded by the hedgehog (hh) multigene family are responsible for the patterning of a variety of embryonic structures in vertebrates and invertebrates. The Drosophila hh gene has now been shown to generate two predominant protein species that are derived by an internal autoproteolytic cleavage of a larger precursor. Mutations that reduced the efficiency of autoproteolysis in vitro diminished precursor cleavage in vivo and also impaired the signaling and patterning activities of the HH protein. The two HH protein species exhibited distinctive biochemical properties and tissue distribution, and these differences suggest a mechanism that could account for the long- and short-range signaling activities of HH in vivo.