Hedgehog signaling is a means of intercellular communication that relies on Smoothened, mutations in which cause cancers such as basal cell carcinoma. We discovered that vertebrate Hedgehog signals move Smoothened to primary cilia, and that this movement is necessary for Smoothened activity. Despite these cell biological insights into Smoothened function, how cilia and Smoothened collaborate to activate the downstream transcriptional effector, Gli2, remains unclear. In this revised renewal application, we examine the molecular mechanisms by which the cilium activates Smo and Gli2. We have discovered that the ciliary membrane is comprised of unique lipids, and that different ciliary lipids are necessary and sufficient to activate mammalian Hedgehog signaling. Therefore, we will test how ciliary lipids participate in Smoothened activation and Hedgehog signaling. How Smoothened communicates to Gli2 remains unknown. We have created a biochemically tractable knock-in Gli2 allele that will allow us to uncover mechanisms of Gli2 activation in embryogenesis and oncogenesis. Additionally, we will assess whether perturbing ciliary lipid composition is a novel means of blocking Hh pathway-related cancer formation. The proposed experiments use a combination of vertebrate genetic, cell biological, imaging and biochemical approaches to reveal how the Hedgehog signal transduction pathway uses cilia to transmit information, both in development and disease.