Mutations of the Sonic hedgehog (SHH) receptor, Patched1 (PTCH1), have been identified in a variety of tumors. PTCH1 is usually considered to be a tumor suppressor gene. However, one normal allele is retained in many tumors. We investigated the mechanism of tumorigenesis in murine heterozygous Ptch1 knock-out mice. Here we show that Ptch1 transcripts, which are consistently overexpressed in tumors in these mice, are derived predominantly from the mutated allele. These transcripts give rise to a mutant protein incapable of pathway inhibition. In contrast, the expression of wild-type transcripts in the tumor is reduced. The transcriptional activity of a Ptch1 promoter is sensitive to methylation. Based on these results, we propose a model, in which tumorigenesis begins with the transcriptional silencing of one PTCH1/Ptch1 allele. This alone has no functional consequences. Upon mutational inactivation of the other allele, the resulting loss of PTCH1/Ptch1 function activates PTCH1/Ptch1 transcription from the non-silenced, ie the mutant, allele. These events can occur in an opposite order. This model is consistent with the expression of PTCH1/Ptch1-derived transcripts and proteins found in tumors, with the sensitivity of the murine Ptch1 promoter to methylation, and with the recently reported effect of demethylating agents on Ptch1 expression. These latter agents could be effective in treatment of, at least, some tumors associated with loss of PTCH1 function.