X-linked hypohidrotic ectodermal dysplasia (XLHED) is a heritable disorder of the ED-1 gene disrupting the morphogenesis of ectodermal structures. The ED-1 gene product, ectodysplasin-A (EDA), is a tumor necrosis factor (TNF) family member and is synthesized as a membrane-anchored precursor protein with the TNF core motif located in the C-terminal domain. The stalk region of EDA contains the sequence -Arg-Val-Arg-Arg156-Asn-Lys-Arg159-, representing overlapping consensus cleavage sites (Arg-X-Lys/Arg-Arg( downward arrow)) for the proprotein convertase furin. Missense mutations in four of the five basic residues within this sequence account for approximately 20% of all known XLHED cases, with mutations occurring most frequently at Arg156, which is shared by the two consensus furin sites. These analyses suggest that cleavage at the furin site(s) in the stalk region is required for the EDA-mediated cell-to-cell signaling that regulates the morphogenesis of ectodermal appendages. Here we show that the 50-kDa EDA parent molecule is cleaved at -Arg156Asn-Lys-Arg(159 downward arrow)- to release the soluble C-terminal fragment containing the TNF core domain. This cleavage appears to be catalyzed by furin, as release of the TNF domain was blocked either by expression of the furin inhibitor alpha1-PDX or by expression of EDA in furin-deficient LoVo cells. These results demonstrate that mutation of a functional furin cleavage site in a developmental signaling molecule is a basis for human disease (XLHED) and raise the possibility that furin cleavage may regulate the ability of EDA to act as a juxtacrine or paracrine factor.