Although cholesterol has long been known to be an essential component of cell membranes in vertebrate organisms, recent studies have suggested that cholesterol plays a crucial role in specific processes during embryonic development, including the covalent modification of Hedgehog proteins. Here we review the overlapping developmental phenotypes associated with pharmacologically or genetically induced defects in cholesterol biosynthesis, embryonic cholesterol transport and Hedgehog proteins. Shared aspects of these phenotypes suggest that common mechanisms underlie impaired central nervous system development associated with cholesterol deficiency.