AbstractHedgehog proteins are of pivotal importance for development and maintenance of tissue patterns in adult organisms. Despite the role of Hedgehogs in differentiation and tumorigenesis, signal transduction of Hedgehog remains a relatively uncharted area of signalling biochemistry. For proper Hedgehog distribution into tissues, two highly unusual covalent modifications are necessary, palmitoylation of a secreted protein and the attachment of a cholesterol group, making Hedgehog the only established sterolated protein in nature. Hedgehog exerts its function via two membrane‐bound receptors, Patched and Smoothened; presumably, Patched transports a cholesterol derivate out of cells which inhibits Smoothened. Binding of Hedgehog to Patched impedes this proposed pump function and thus Inhibition of Smoothened, which leads to expression of genetic Hedgehog targets via relief of transcriptional repression. These atypical features make Hedgehog physiology unique in biology and may explain why this field has attracted such significant attention. BioEssays 26:387–394, 2004. © 2004 Wiley Periodicals, Inc.