In mice, three Gli genes are thought to mediate sonic hedgehog (Shh) signaling collectively. Mis-expression studies and analysis of null mutants for each gene have indicated that the Gli proteins have different functions. In particular, Gli1 appears to be a constitutive activator, and Gli2 and Gli3 have repressor functions. To determine the precise functional differences between Gli1 and Gli2, we have expressed Gli1 in place of Gli2 from the endogenous Gli2 locus in mice. Strikingly, a low level of Gli1 can rescue all the Shh signaling defects in Gli2 mutants; however, only in the presence of a wild-type Shh gene. These studies demonstrate that only the activator function of Gli2 is actually required, and indicates that in specific situations, Shh can modulate the ability of Gli1 to activate target genes. Furthermore, expression of both copies of Gli1 in place of Gli2 does not disrupt spinal cord patterning, but does result in new gain-of-function defects that lead to lethality. We show that the defects are enhanced when Gli3 function is reduced, demonstrating that an important difference between Gli1 and Gli2 is the ability of Gli1 to antagonize Gli3 function.