The Drosophila transforming growth factor beta (TGF-beta) homolog Decapentaplegic (Dpp) acts as a morphogen that forms a long-range concentration gradient to direct the anteroposterior patterning of the wing. Both planar transcytosis initiated by Dynamin-mediated endocytosis and extracellular diffusion have been proposed for Dpp movement across cells. In this work, we found that Dpp is mainly extracellular, and its extracellular gradient coincides with its activity gradient. We demonstrate that a blockage of endocytosis by the dynamin mutant shibire does not block Dpp movement but rather inhibits Dpp signal transduction, suggesting that endocytosis is not essential for Dpp movement but is involved in Dpp signaling. Furthermore, we show that Dpp fails to move across cells mutant for dally and dally-like (dly), two Drosophila glypican members of heparin sulfate proteoglycan (HSPG). Our results support a model in which Dpp moves along the cell surface by restricted extracellular diffusion involving the glypicans Dally and Dly.