Melanocytes in the skin are melanin-producing cells that are derived from the neural crest. They migrate during embryological development and localize in the epidermis and hair follicles where they pigment skin and hair. Melanocytes and their production of melanin pigment (a process termed melanogenesis) have important roles in cutaneous physiology. The most obvious and most studied function of melanocytes is to synthesize melanin that confers color on skin and hair and protects epidermal cells from ultraviolet radiation-induced changes in DNA structure. However, accumulating evidence has shown that melanocytes are also active factors in the skin immune system, participate in immune responses, and have immunomodulatory properties. Melanocyte development provides an excellent model for studying more complex developmental processes. Melanocytes have an apparently simple etiology, differentiating from the neural crest and migrating through the developing embryo to specific locations within the skin and hair follicles, and to other sites in the body. The study of pigmentation mutations in the mouse provided the initial key to identifying the genes and proteins involved in melanocyte development. In addition, work on the chicken has provided important embryological and molecular insights, whereas studies in zebrafish have allowed live imaging as well as genetic and transgenic approaches. This cross-species approach is powerful and, as we review here, has resulted in a detailed understanding of melanocyte development and differentiation, melanocyte stem cells, and the role of the melanocyte lineage in diseases such as melanoma.