Communication between cells pervades the development and physiology of metazoans. In animals, this process is carried out by a relatively small number of signaling pathways, each consisting of a chain of biochemical events through which extracellular stimuli control the behavior of target cells. One such signaling system is the Hedgehog pathway, which is crucial in embryogenesis and is implicated in many birth defects and cancers. Although Hedgehog pathway components were identified by genetic analysis more than a decade ago, our understanding of the molecular mechanisms of signaling is far from complete. In this review, we focus on the biochemistry and cell biology of the Hedgehog pathway. We examine the unique biosynthesis of the Hedgehog ligand, its specialized release from cells into extracellular space, and the poorly understood mechanisms involved in ligand reception and pathway activation at the surface of target cells. We highlight several critical questions that remain open.