Proteins of the Hedgehog (Hh) family act as important developmental signals in a variety of species [1]. Hh proteins are synthesized as full-length precursors that are autocatalytically cleaved by their C-terminal domains to release the signaling N-terminal domains [2]. The addition of a cholesterol molecule to the C terminus of the signaling domain is concomitant with cleavage [3]. Vertebrate Sonic hedgehog (Shh) proteins have also been shown to acquire a fatty acid chain on the N-terminal cysteine of this domain [4], which is required for a subset of their in vivo functions [5, 6]. A mutation of the corresponding cysteine in Drosophila Hh transforms it into a dominant-negative protein [6]. We have identified a novel gene, sightless (sit), which is required for the activity of Drosophila Hh in the eye and wing imaginal discs and in embryonic segmentation. sit acts in the cells that produce Hh, but does not affect hh transcription, Hh cleavage, or the accumulation of Hh protein. sit encodes a conserved transmembrane protein with homology to a family of membrane-bound acyltransferases. The Sit protein could act by acylating Hh or by promoting other modifications or trafficking events necessary for its function.