The secreted protein products of the hedgehog (hh) gene family are associated with local and long-range signalling activities that are responsible for developmental patterning in multiple systems, including Drosophila embryonic and larval tissues and vertebrate neural tube, limbs and somites. In a process that is critical for full biological activity, the hedgehog protein (Hh) undergoes autoproteolysis to generate two biochemically distinct products, an 18K amino-terminal fragment, N, and a 25K carboxy-terminal fragment, C (ref. 16); mutations that block autoproteolysis impair Hh function. We have identified the site of autoproteolytic cleavage and find that it is broadly conserved throughout the hedgehog family. Knowing the site of cleavage, we were able to test the function of the N and C cleavage products in Drosophila assays. We show here that the N product is the active species in both local and long-range signalling. Consistent with this, all twelve mapped hedgehog mutations either affected the structure of the N product directly or otherwise blocked the release of N from the Hh precursor as a result of deletion or alteration of sequences in the C domain.