The Drosophila tumor suppressors fat and discs overgrown (dco) function within an intercellular signaling pathway that controls growth and polarity. fat encodes a transmembrane receptor, but post-translational regulation of Fat has not been described. We show here that Fat is subject to a constitutive proteolytic processing, such that most or all cell surface Fat comprises a heterodimer of stably associated N- and C-terminal fragments. The cytoplasmic domain of Fat is phosphorylated, and this phosphorylation is promoted by the Fat ligand Dachsous. dco encodes a kinase that influences Fat signaling, and Dco is able to promote the phosphorylation of the Fat intracellular domain in cultured cells and in vivo. Evaluation of dco mutants indicates that they affect Fat's influence on growth and gene expression but not its influence on planar cell polarity. Our observations identify processing and phosphorylation as post-translational modifications of Fat, correlate the phosphorylation of Fat with its activation by Dachsous in the Fat-Warts pathway, and enhance our understanding of the requirement for Dco in Fat signaling.