The secreted Drosophila Hedgehog (Hh) protein induces transcription of specific genes by an unknown mechanism that requires the serpentine transmembrane protein Smoothened (Smo) and the transcription factor Cubitus interruptus (Ci). Protein kinase A (PKA) has been implicated in the mechanism of Hh signal transduction because it acts to repress Hh target genes in imaginal disc cells that express Ci. Changes in Ci protein levels, detected by an antibody that recognizes an epitope in the carboxy-terminal half of Ci, have been suggested to mediate the positive effects of Hh and the negative effects of PKA on Hh target gene expression in imaginal discs. Here we show that PKA inhibition, like Hh, leads to increased "carboxy-terminal" Ci staining and Hh target gene expression in embryos. In addition, we find that Hh and Smo can stimulate target gene expression at constant Ci levels and that increased PKA activity can induce ectopic Hh target gene expression in a manner that requires Smo and Ci activities but does not involve changes in Ci protein concentration. This suggests a branching pathway of Hh signal transduction downstream of Smo and that PKA exerts opposite effects on the two branches. Finally we show that Hh signaling in embryos does not depend on cAMP-dependent regulation of PKA activity.