Holoprosencephaly (HPE), a human developmental brain defect, usually is also associated with varying degrees of midline facial dysmorphism. Heterozygous mutations in the Sonic hedgehog (SHH) gene are the most common genetic lesions associated with HPE, and loss of Shh function in the mouse produces cyclopia and alobar forebrain development. The N-terminal domain (ShhNp) of Sonic hedgehog protein, generated by cholesterol-dependent autoprocessing and modification at the C terminus and by palmitate addition at the N terminus, is the active ligand in the Shh signal transduction pathway. Here, we analyze seven reported missense mutations (G31R, D88V, Q100H, N115K, W117G, W117R, and E188Q) that alter the N-terminal signaling domain of Shh protein, and show that two of these mutations (Q100H and E188Q), which are questionably linked to HPE, produce no detectable effects on function. The remaining five alterations affect normal processing, Ptc binding, and signaling to varying degrees. These effects include introduction of a recognition site for furin-like proteases by the G31R alteration, resulting in cleavage of 11 amino acid residues from the N terminus of ShhNp and consequent reduced signaling potency. Two other alterations, W117G and W117R, cause temperature-dependent misfolding and retention in the sterol-poor endoplasmic reticulum, thus disrupting cholesterol-dependent autoprocessing.