The Hedgehog (Hh) signal transduction pathway plays critical instructional roles during development. Activating mutations in human Hh signaling components predispose to a variety of tumor types, and have been observed in sporadic tumors occurring in a wide range of organs. Multiple insights into the regulation of Hh signaling have been achieved through studies using Drosophila melanogaster as a model organism. In Drosophila, regulation of the transcription factor Cubitus interruptus (Ci) is the ultimate target of the Hh pathway. Ci is regulated through communication of the membrane proteins Patched (Ptc) and Smoothened (Smo) to the intracellular Hedgehog Signaling Complex (HSC) in response to a graded concentration of Hh ligand. The HSC consists of the Kinesin Related Protein, Costal2 (Cos2), the serine-threonine protein kinase. Fused (Fu) and Ci. In the absence of Hh stimulation, the HSC is involved in processing of Ci to a truncated repressor protein. In response to Hh binding to Ptc, processing of Ci is blocked to allow for accumulation of full-length Ci activator protein(s). Differential concentrations of Hh ligand stimulate production of Ci transcriptional activators of varying strength, which facilitate activation of distinct subsets of target genes. The mechanism(s) by which Ptc and Smo communicate with the HSC in response to differential ligand concentrations to regulate Ci function are not yet fully elucidated. Here, we review what is known about regulation of individual Hh signaling components, concentrating on the mechanisms by which the Hh signal is propagated through Smo to the HSC.