We investigated the function of Lhx2, a LIM homeobox gene expressed in developing B-cells, forebrain and neural retina, by analyzing embryos deficient in functional Lhx2 protein. Lhx2 mutant embryos are anophthalmic, have malformations of the cerebral cortex, and die in utero due to severe anemia. In Lhx2−/− embryos specification of the optic vesicle occurs; however, development of the eye arrests prior to formation of an optic cup. Deficient cellular proliferation in the forebrain results in hypoplasia of the neocortex and aplasia of the hippocampal anlagen. In addition to the central nervous system malformations, a cell non-autonomous defect of definitive erythropoiesis causes severe anemia in Lhx2−/− embryos. Thus Lhx2 is necessary for normal development of the eye, cerebral cortex, and efficient definitive erythropoiesis.