With the realization that many proto-oncogenes and tumor suppressor genes are expressed and have important functions during mammalian development, it is clear that cancer often involves the inappropriate activation of genetic pathways used during normal development. A signaling cascade that has been of considerable interest to both developmental and cancer biologists involves the Hedgehog (Hh) family of secreted proteins. To date, the only transcription factors shown to be directly downstream of Hh are the zinc-finger containing proteins Cubitus interruptus (Ci) and Gli, in flies and vertebrates, respectively. The identification of many of the genes and proteins involved in Hh signaling has come largely from genetic and biochemical studies in Drosophila. Ci mediates Hh signaling through a Hh-dependent set of protein modifications that alter the activity of Ci on Hh target genes. Recent evidence suggests vertebrate Gli proteins may be similarly regulated. The interest in this pathway has taken on added importance with the identification of mutations in Hh pathway genes, including Gli genes, in several human developmental disorders and cancers. We discuss models for how Gli proteins mediate Hh signaling in both vertebrate development and cancers.