Hedgehog (HH) is an important morphogen involved in pattern formation during Drosophila embryogenesis and disc development. cubitus interruptus (ci) encodes a transcription factor responsible for transducing the hh signal in the nucleus and activating hh target gene expression. Previous studies have shown that CI exists in two forms: a 75 kDa proteolytic repressor form and a 155 kDa activator form. The ratio of these forms, which is regulated positively by hh signaling and negatively by PKA activity, determines the on/off status of hh target gene expression. In this paper, we demonstrate that the exogenous expression of CI that is mutant for four consensus PKA sites [CI(m1-4)], causes ectopic expression of wingless (wg) in vivo and a phenotype consistent with wg overexpression. Expression of CI(m1-4), but not CI(wt), can rescue the hh mutant phenotype and restore wg expression in hh mutant embryos. When PKA activity is suppressed by expressing a dominant negative PKA mutant, the exogenous expression of CI(wt) results in overexpression of wg and lethality in embryogenesis, defects that are similar to those caused by the exogenous expression of CI(m1-4). In addition, we demonstrate that, in cell culture, the mutation of any one of the three serine-containing PKA sites abolishes the proteolytic processing of CI. We also show that PKA directly phosphorylates the four consensus phosphorylation sites in vitro. Taken together, our results suggest that positive hh and negative PKA regulation of wg gene expression converge on the regulation of CI phosphorylation.