The segment polarity genes play a fundamental role in the patterning o
f cells within individual body segments of the Drosophila embryo. Two
of these genes wingless (wg) and hedgehog (hh) encode proteins that en
ter the secretory pathway and both are thought to act by instructing t
he fates of cells neighbouring those in which they are expressed. Gene
tic analysis has identified the transcriptional activation of wg as on
e of the targets of hh activity: here me present evidence that transdu
ction of the hh-encoded signal is mediated by the activity of four oth
er segment polarity genes, patched, fused, costal-2 and cubitus interr
uptus. The results of our genetic epistatsis analysis together with th
e molecular structures of the products of these genes where known, sug
gest a pathway of interactions leading from reception of the hh-encode
d signal at the cell membrane to transcriptional activation in the cel
l nucleus. We have also found that transcription of patched is regulat
ed by the same pathway and describe the identification of cis-acting u
pstream elements of the ptc transcription unit that mediate this regul
ation.