The sonic hedgehog (Shh) signaling pathway is crucial for normal lung development. In the lung, epithelial-produced Shh signals via mesenchymal Gli1-3 transcription factors. Gli null lung phenotypes suggest that Gli2 is the primary Gli transcription factor transducing Shh-regulated lung growth, although the mechanism has yet to be elucidated. To clarify the role of Gli2 during lung development, we over-expressed gli2 in the lung mesenchyme of mice, to investigate for changes in Shh signaling, and cellular proliferation. The ectopic over-expression of gli2 resulted in increased Shh pathway activation as evident by increased expression of shh, ptc1, ptc2, smo, hhip, and gli1. Interestingly, we also observed increased expression of gli3 transcripts. Using two different mouse models, gli3 null and gli3699 (Gli3 constitutive repressor), it was found that Gli3 activity does not affect the levels of gli2 in the developing lung. Real-time PCR and immunoblotting revealed that there is increased expression of cyclins D1, D2 and E1 associated with increased gli2 levels. Furthermore, the increase and decrease of cyclins (associated with changes in gli2 levels) positively correlated with cellular proliferation, as assessed by phospho-histone H3 immunohistochemistry. To determine if Gli3 has an effect on cyclin expression in the developing lung, we measured the levels of cyclin D1, D2 and E1, in gli3 null and gli3699 mice and compared them to their wildtype counterparts. However, no change in the levels of cyclins D1, D2 or E1 due to altered Gli3 was observed. These findings suggest that Gli2 and not Gli3 is the primary mediator of Shh signaling influencing fetal lung growth through cyclin regulation.