Transcriptional activation of Hedgehog (Hh) target genes requires Cubitus interruptus, a 155 kDa cytoplasmic zinc finger protein (Ci155), which in the absence of Hh signaling is processed to form a nuclear repressor (Ci75). We show that Hh signaling reduces phosphorylation of Ci155, and this reduction in turn appears to decrease processing. Blocking processing with proteasome inhibitors or altered Ci proteins, however, is insufficient for activation of Hh targets. We find that Hh signaling increases the rate of Ci155 nuclear import, resulting in significant nuclear accumulation. Even in the absence of signaling, nuclear accumulation of Ci155 suffices for significant induction of Hh targets, and active nuclear export of Ci155 is an essential mechanism for maintenance of the unstimulated state.