Hedgehog (Hh) signaling plays pivotal roles in embryonic development and adult tissue homeostasis, and its deregulation leads to numerous human disorders including cancer. Binding of Hh to Patched (Ptc), a twelve-transmembrane protein, alleviates its inhibition of Smoothened (Smo), a seven-transmembrane protein related to G-protein-coupled receptors (GPCRs), leading to Smo phosphorylation and activation. Smo acts through intracellular signaling complexes to convert the latent transcription factor Cubitus interruptus (Ci)/Gli from a truncated repressor to a full-length activator, leading to derepression/activation of Hh target genes. Increasing evidence suggests that phosphorylation participates in almost every step in the signal relay from Smo to Ci/Gli, and that differential phosphorylation of several key pathway components may be crucial for translating the Hh morphogen gradient into graded pathway activities. In this review, we focus on the multifaceted roles that phosphorylation plays in Hh signal transduction, and discuss the conservation and difference between Drosophila and mammalian Hh signaling mechanisms.