The Smith‐Lemli‐Opitz syndrome (SLOS) is an autosomal recessive condition involving craniofacial and central nervous system malformations with occasional holoprosencephaly (HPE). It is caused by a defect in the 7‐dehydrocholesterol (7‐DHC) reductase, the enzyme catalyzing the last step of cholesterol biosynthesis. Treatment of pregnant rats with inhibitors of 7‐DHC reductase, either AY9944 or BM15.766, has provided a valuable model to study the pathogenesis in SLOS. Recently, cholesterol has been shown to be involved in the post‐translational activation of the signaling protein Sonic Hedgehog. To identify the early defects associated with HPE in a rat model of SLOS, and to compare the phenotype of the treated embryos with that of the Shh^‐/‐ mutants, we examined brain morphology and expression of three developmental genes (Shh, Otx2, and Pax6 ) in 23‐somite stage embryos from AY9944‐treated dams. We report clearly abnormal morphology of the developing brain, concerning primarily the ventral aspect of the neural tube. We observed a reduced or absent expression of Shh and Otx2 in their ventral domain associated with extended ventral expression of Pax6. The results suggest an absence of the midline ventral cell type at all levels of the cranial neural tube. They provide further evidence that cholesterol‐deficiency‐induced HPE originates from impaired Shh signaling activity in the ventral neural tube. Am. J. Med. Genet. 87:207–216, 1999. © 1999 Wiley‐Liss, Inc.