Drosophila Hedgehog (Hh) is secreted by Posterior (P) compartment cells and induces Anterior (A) cells to create a developmental organizer at the AP compartment border. Hh signaling converts Fused (Fu) to a hyperphosphorylated form, Fu*. We show that A border cells of wing imaginal discs contain Fu*. Unexpectedly, P cells also produce Fu*, in a Hh-dependent and Ptc-independent manner. Increasing Ptc, the putative Hh receptor expressed specifically by A cells, reduced Fu*. These results are consistent with proposals that Ptc downregulates Hh signaling and suggest that a receptor other than Ptc mediates Hh signaling in P cells of imaginal discs. We conclude that Hh signals in these P cells and that the outputs of the pathway are blocked by transcriptional repression.