Hedgehog (Hh) acts as a morphogen in various developmental contexts to specify distinct cell fates in a concentration-dependent manner. Hh signaling is regulated by two conserved cell-surface proteins: Ig/fibronectin superfamily member Interference hedgehog (Ihog) and Dally-like (Dlp), a glypican that comprises a core protein and heparan sulfate glycosaminoglycan (GAG) chains. Here, we show in Drosophila that the Dlp core protein can interact with Hh and is essential for its function in Hh signaling. In wing discs, overexpression of Dlp increases short-range Hh signaling while reducing long-range signaling. By contrast, Ihog has biphasic activity in Hh signaling in cultured cells: low levels of Ihog increase Hh signaling, whereas high levels decrease it. In wing discs, overexpression of Ihog represses high-threshold targets, while extending the range of low-threshold targets, thus showing opposite effects to Dlp. We further show that Ihog and its family member Boi are required to maintain Hh on the cell surface. Finally, Ihog and Dlp have complementary expression patterns in discs. These data led us to propose that Dlp acts as a signaling co-receptor. However, Ihog might not act as a classic co-receptor; rather, it may act as an exchange factor by retaining Hh on the cell surface, but also compete with the receptor for Hh binding.