Secreted signals, known as morphogens, provide the positional information that organizes gene expression and cellular differentiation in many developing tissues. In the vertebrate neural tube, Sonic Hedgehog (Shh) acts as a morphogen to control the pattern of neuronal subtype specification. Using an in vivo reporter of Shh signaling, mouse genetics, and systems modeling, we show that a spatially and temporally changing gradient of Shh signaling is interpreted by the regulatory logic of a downstream transcriptional network. The design of the network, which links three transcription factors to Shh signaling, is responsible for differential spatial and temporal gene expression. In addition, the network renders cells insensitive to fluctuations in signaling and confers hysteresis--memory of the signal. Our findings reveal that morphogen interpretation is an emergent property of the architecture of a transcriptional network that provides robustness and reliability to tissue patterning.