The Hedgehog (Hh) signaling pathway coordinates cell-cell communication in development and regeneration. Defects in this pathway underlie diseases ranging from birth defects to cancer. Hh signals are transmitted across the plasma membrane by two proteins, Patched 1 (PTCH1) and Smoothened (SMO). PTCH1, a transporter-like tumor-suppressor protein, binds to Hh ligands, but SMO, a G-protein-coupled-receptor family oncoprotein, transmits the Hh signal across the membrane. Recent structural, biochemical and cell-biological studies have converged at the surprising model that a specific pool of plasma membrane cholesterol, termed accessible cholesterol, functions as a second messenger that conveys the signal between PTCH1 and SMO. Beyond solving a central puzzle in Hh signaling, these studies are revealing new principles in membrane biology: how proteins respond to and remodel cholesterol accessibility in membranes and how the cholesterol composition of organelle membranes is used to regulate protein function.