Hedgehog (Hh) proteins play diverse organizing roles in development by regulating gene expression in responding cells. The Gli homolog Cubitus interruptus (Ci) is involved in controlling the transcription of Hh target genes. A repressor form of Ci arises in the absence of Hh signaling by proteolytic cleavage of intact Ci. We show that this cleavage is essential for limb patterning and is regulated by Hh in vivo. We provide evidence for the existence of a distinct activator form of Ci, which does not arise by mere prevention of Ci proteolysis, but rather depends on a separate regulatory step subject to Hh control. These different activities of Ci regulate overlapping but distinct subsets of Hh target genes. Thus, limb development is organized by the integration of different transcriptional outputs of Hh signaling.