Gain‐of‐function mutations in SMO have been implicated in constitutive activation of the hedgehog signaling pathway in human basal cell carcinomas (BCCs). We used a truncated keratin 5 (ΔK5) promoter to assess the potential role of the human M2SMO mutant in BCC development in adult transgenic mice. ΔK5‐M2SMO mouse epidermis is hyperproliferative, ex presses BCC protein markers and gives rise to numerous epithelial downgrowths invading the underlying dermis. Lesions strikingly similar to human basaloid follicular hamartomas develop, but BCCs do not arise even in elderly mice. Hedgehog target gene transcripts were only modestly upregulated in mouse and human follicular hamartomas, in contrast to the high levels detected in BCCs. Cyclins D1 and D2 were selectively upregulated in mouse BCCs. Our data suggest that the levels of hedgehog pathway activation and G 1 cyclins are major determinants of tumor phenotype in skin, and strongly implicate deregulated hedgehog signaling in the genesis of human basaloid follicular hamartomas. Expression of an activated SMO mutant in keratinocytes appears to be insufficient for the development and/or maintenance of full‐blown BCCs.