Basal cell carcinoma (BCC) is the most common human malignancy, affecting 750,000 Americans each year. The understanding of mutations that are known to activate hedgehog (Hh) signalling pathway genes, including PATCHED (PTCH), sonic hedgehog (Shh) and smoothened (Smo), has substantially expanded our current understanding of the genetic basis of BCC development. The Hh signalling pathway is one of the most fundamental signal transduction pathways in embryonic development. In skin, the Shh pathway is crucial for maintaining stem cell population, and for regulating hair follicle and sebaceous gland development. This pathway plays a minimal role in adult tissues, but is known to be activated in many neoplasms, including those arising in the skin. In this review, we attempt to summarize the results of published studies on some important aspects of the Shh pathway and its involvement in skin development and carcinogenesis. We also provide a description of various animal models that have been developed, based on our knowledge of the Shh pathway in human skin cancers. Additionally, we include a brief description of studies conducted in our laboratory and by others on the chemoprevention of BCCs. This review therefore provides a current understanding of the role of the Shh pathway in skin development and neoplasia. It also provides a basis for the molecular target-based chemoprevention and therapeutic management of skin cancer.