The Hedgehog signalling pathway is crucial for development, adult stem cell maintenance, cell migration and axon guidance in a wide range of organisms. During development, the Hh morphogen directs tissue patterning according to a concentration gradient. Lipid modifications on Hh are needed to achieve graded distribution, leading to debate about how Hh is transported to target cells despite being membrane-tethered. Cytonemes in the region of Hh signalling have been shown to be essential for gradient formation, but the carrier of the morphogen is yet to be defined. Here we show that Hh and its co-receptor Ihog are in exovesicles transported via cytonemes. These exovesicles present protein markers and other features of exosomes. Moreover, the cell machinery for exosome formation is necessary for normal Hh secretion and graded signalling. We propose Hh transport via exosomes along cytonemes as a significant mechanism for the restricted distribution of a lipid-modified morphogen.