Hedgehog (HH) proteins are an important class of secreted intercellular signals. The HH signal-transduction pathway is not fully understood, but a number of novel features have been elucidated recently. It is now clear that, during processing to generate an active signal, Drosophila HH proteins become covalently linked to cholesterol and are thereby largely tethered to the cell surface. HH signalling could therefore be affected by cholesterol metabolism. In addition, the pathway downstream of receptor binding involves a unique signalling complex containing the transcription factor CUBITUS INTERRUPTUS (CI), which becomes dissociated from microtubules in response to HH. This review discusses these new findings and their implications for HH signalling.