The PTCH1 gene is a human tumour suppressor gene frequently mutated in basal cell carcinoma (BCC) and several other tumour types. It encodes a receptor for soluble factors of the hedgehog family. Binding of hedgehog to the receptor relieves its inhibitory action on the transmembrane co-receptor Smoh. In this study we describe alternative first exons of the PTCH1 tumour suppressor gene and show that they are differentially regulated in normal tissues, exon 1B being expressed at very low levels and the major mRNA species containing exon 1 or 1A. Exon 1B transcripts were found to be specifically upregulated in nodular BCCs. The different PTCH1 transcripts all encode proteins that interact with Smoh in doubly transfected cells. Furthermore, functional assays demonstrated that whereas all PTCH1 isoforms can inhibit the activity of SHH, only the PTCH1B isoform is capable of fully inhibiting Smoh activity. The results indicate that in tumour cells the PTCH1B promoter is specifically activated and importantly, that the N-terminal part of PTCH1 including exon 1B is required for full inhibition of Smoh signaling but not for physical interaction with Smoh.