Interaction between distinctly specified cells in adjacent compartments establishes organizing centres that control growth and specify cell fate in the developing limbs of Drosophila. Localized expression of the secreted Hedgehog protein (Hh) by cells in the posterior compartment induces expression of the secreted signalling molecules decapentaplegic (dpp) or wingless (wg) in nearby anterior cells. wg and dpp in turn organize spatial pattern in the wing and leg imaginal discs. The Hh signal is thought to act by antagonizing the ability of the patched (ptc) gene product to repress wg and dpp expression. Here we present evidence that removing activity of the gene encoding cyclic AMP-dependent protein kinase A (pka) is functionally equivalent to removing ptc activity or to providing cells with the Hh signal. These findings suggest that cyclic AMP-dependent protein kinase A is a component of the signal transduction pathway through which Hh and Ptc direct localized expression of dpp (or wg) and establish the compartment boundary organizer.