The Hedgehog signal transduction pathway is involved in diverse patterning events in many organisms. In Drosophila, Hedgehog signaling regulates transcription of target genes by modifying the activity of the DNA-binding protein Cubitus interruptus (Ci). Hedgehog signaling inhibits proteolytic cleavage of full-length Ci (Ci-155) to Ci-75, a form that represses some target genes, and also converts the full-length form to a potent transcriptional activator. Reduction of protein kinase A (PKA) activity also leads to accumulation of full-length Ci and to ectopic expression of Hedgehog target genes, prompting the hypothesis that PKA might normally promote cleavage to Ci-75 by directly phosphorylating Ci-155. Here we show that a mutant form of Ci lacking five potential PKA phosphorylation sites (Ci5m) is not detectably cleaved to Ci-75 in Drosophila embryos. Moreover, changes in PKA activity dramatically altered levels of full-length wild-type Ci in embryos and imaginal discs, but did not significantly alter full-length Ci5m levels. We corroborate these results by showing that Ci5m is more active than wild-type Ci at inducing ectopic transcription of the Hh target gene wingless in embryos and that inhibition of PKA enhances induction of wingless by wild-type Ci but not by Ci5m. We therefore propose that PKA phosphorylation of Ci is required for the proteolysis of Ci-155 to Ci-75 in vivo. We also show that the activity of Ci5m remains Hedgehog responsive if expressed at low levels, providing further evidence that the full-length form of Ci undergoes a Hedgehog-dependent activation step.