The Gli family of transcription factors (Gli1, 2 and 3) mediate the Hedgehog morphogenetic signal by regulating the expression of downstream target genes. Aberrations in Hedgehog signaling seriously affect vertebrate development. Postnatally, Hedgehog signaling has been postulated to play a pivotal role in healing and repair processes and inappropriate pathway activation has been implicated in several types of cancers. To better understand both the upstream regulation of the Gli transcription factors, as well as their unique and combinatorial roles in regulating the expression of Hedgehog target genes, we have characterized embryonic fibroblasts (MEFs) from Gli mutant mice. Stimulation of wild-type MEFs by Sonic Hedgehog (Shh) peptide elicited unique profiles of induction of Hedgehog target genes Gli1, Ptc1, and Hip1. Gli2 loss-of-function was associated with diminished Shh-induced target gene expression, while Gli3 loss-of-function was associated with increased basal and Shh-induced target gene expression. The loss of Gli1 alone had no effect on target gene induction but did diminish Shh-induced target gene expression when combined with the loss of Gli2 or Gli3. Additionally, overexpression of Gli1 induced target gene expression in Gli2(-/-)3(-/-) MEFs, while Shh stimulation did not. Using MEFs expressing only Gli2 or Gli3, we found that both cyclopamine and the PKA activator forskolin inhibited target gene induction mediated by Gli2 and Gli3. These results demonstrate that Gli2 and Gli3 share common regulatory mechanisms and modulate Hedgehog target gene expression directly and independently while also regulating Gli1 expression, which in specific contexts, coordinately contributes to target gene activation.