Zebrafish you-too (yot) mutations interfere with Hedgehog (Hh) signaling during embryogenesis. Using a comparative synteny approach, we isolated yot as a zinc finger transcription factor homologous to the Hh target gli2. Two alleles of yot contain nonsense mutations resulting in carboxy-terminally truncated proteins. In addition to causing defects in midline development, muscle differentiation, and retinal axon guidance, yot mutations disrupt anterior pituitary and ventral forebrain differentiation. yot mutations also cause ectopic lens formation in the ventral diencephalon. These findings reveal that truncated zebrafish Gli2 proteins interfere with Hh signaling necessary for differentiation and axon guidance in the ventral forebrain.