Polypeptide ligands have long been recognized as primary signaling molecules in diverse physiological processes in animal systems. Recent studies in plants have provided major breakthroughs with the discovery that small polypeptides are also involved in many plant biological processes, indicating that the use of polypeptides as signaling molecules in cell-to-cell communication is evolutionarily conserved. The CLAVATA3 (CLV3)/ENDOSPERM SURROUNDING REGION (ESR)-related (CLE) proteins are currently the best understood family of small polypeptides in plants. The recent isolation of MCLV3 from Arabidopsis and TDIF from a Zinnia cell culture system indicates that biologically active CLE polypeptides are produced by post-translational proteolysis and modification, similar to peptide hormone production in animals and yeast. Here, we review exciting discoveries involving the identification of the CLE proteins and their functions in various aspects of plant development, including restriction of stem cell accumulation by CLV3 and inhibition of xylem differentiation by TDIF.