Signaling of Indian hedgehog (Ihh), one of the key regulators of endochondral ossification is mediated by transcription factors of the Gli family, Gli1, Gli2, and Gli3. Gli3 and to a lesser extent Gli2 can be proteolytically processed into short repressor proteins. Upon Ihh signaling, processing is inhibited and the full-length proteins function as activators of transcription. Gli3 has been shown to mainly act as a repressor of Ihh target genes in chondrocytes, but the role of other Gli isoforms is less clear. Analyzing mouse mutants deficient for Ihh;Gli2 or Gli3;Gli2, we show here that the Gli2 repressor has no detectable function in chondrocyte or osteoblast differentiation. Instead, Gli2 seems to act as an activator to fully induce the expression of Ihh target genes in skeletal tissues. Furthermore, we show that, in the absence of Gli3, the activator function of Gli2 is sufficient to induce Ihh-dependent osteoblast differentiation. Developmental Dynamics 239:1818–1826, 2010. © 2010 Wiley-Liss, Inc.