cDNAs were isolated that represent transcripts of the Drosophila segment polarity gene, hedgehog (hh). Sequence analysis reveals a motif characteristic of a transmembrane domain, suggesting that the hh protein is membrane-associated. hh expression in epidermal cells is confined to the posterior compartments and coincides precisely with that of engrailed (en). Despite the similar patterns of expression in the cellular blastoderm, hh expression is independent of en, but hh expression becomes sensitive to and dependent on en during the extended germ band stage. The ectopic expression of hh that is normally induced in patched (ptc) mutant embryos does not appear in ptc en double mutants. We discuss these findings in terms of the relationship between en and hh, and the role of the hh function.