Recent studies in Drosophila have shown that heparan sulfate proteoglycans (HSPGs) are required for Wingless (Wg/Wnt) signaling. In addition, genetic and phenotypic analyses have implicated the glypican gene dally in this process. Here, we report the identification of another Drosophila glypican gene, dally-like (dly) and show that it is also involved in Wg signaling. Inhibition of dly gene activity implicates a function for DLY in Wg reception and we show that overexpression of DLY leads to an accumulation of extracellular Wg. We propose that DLY plays a role in the extracellular distribution of Wg. Consistent with this model, a dramatic decrease of extracellular Wg was detected in clones of cells that are deficient in proper glycosaminoglycan biosynthesis. We conclude that HSPGs play an important role in organizing the extracellular distribution of Wg.