Cerebellar granule cells are the most abundant neurons in the brain, and granule cell precursors (GCPs) are a common target of transformation in the pediatric brain tumor medulloblastoma. Proliferation of GCPs is regulated by the secreted signaling molecule Sonic hedgehog (Shh), but the mechanisms by which Shh controls proliferation of GCPs remain inadequately understood. We used DNA microarrays to identify targets of Shh in these cells and found that Shh activates a program of transcription that promotes cell cycle entry and DNA replication. Among the genes most robustly induced by Shh are cyclin D1 and N-myc. N-myc transcription is induced in the presence of the protein synthesis inhibitor cycloheximide, so it appears to be a direct target of Shh. Retroviral transduction of N-myc into GCPs induces expression of cyclin D1, E2F1, and E2F2, and promotes proliferation. Moreover, dominant-negative N-myc substantially reduces Shh-induced proliferation, indicating that N-myc is required for the Shh response. Finally, cyclin D1 and N-myc are overexpressed in murine medulloblastoma. These findings suggest that cyclin D1 and N-myc are important mediators of Shh-induced proliferation and tumorigenesis.