sonic hedgehog (Shh) is expressed in tissues with known signalling capacities, such as the notochord, the floor plate of the central nervous system, and the zone of polarizing activity in the limb. Several lines of evidence indicate that Shh is involved in floor plate induction, somite patterning, and regulation of anterior-posterior polarity in the vertebrate limb. In this report, we investigate the biochemical behavior of Shh in a variety of expression systems and embryonic tissues. Expression of mouse Shh in Xenopus oocytes, COS cells, and baculovirus-infected insect cells demonstrates that in addition to signal peptide cleavage and N-linked glyco-sylation, chicken and mouse Shh proteins undergo additional proteolytic processing to yield two peptides with molecular masses of approximately 19 kDa (amino terminus) and 27 kDa (carboxy terminus), both of which are secreted. In transfected COS cells, we show that the 19-kDa peptide does not accumulate significantly in the medium unless heparin or suramin is added, suggesting that this peptide associates with the cell surface or extracellular matrix. This retention appears to depend on sequences in the carboxy-terminal part of the peptide. Finally, detection of the 19-kDa product in a variety of mouse and chicken embryonic tissues demonstrates that the proteolytic processing observed in cell culture is a normal aspect of Shh processing in embryonic development. These results raise the possibility that amino- and carboxyl-terminal regions of Shh may have distinct functions in regulating cell-cell interactions in the vertebrate embryo.