Smad7 is an intracellular inhibitory protein that antagonizes the signaling of TGF-β family members. Deletion of Smad7 in the mouse leads to an abnormality in heart development. However, whether Smad7 has a functional role in the development of other organs has been elusive. Here we present evidence that Smad7 imparts a role to eye development in the mouse. Smad7 is expressed in both the lens and retina in the developing embryonic eye. Depletion of Smad7 caused various degrees of coloboma and microphthalmia with alterations in cell apoptosis and proliferation in eyes. Smad7 was implicated in lens differentiation but was not required for the induction of the lens placode. The development of the periocular mesenchyme was retarded with the down-regulation of Bmp7 and Pitx2 in mutant mice. Retinal spatial patterning was affected by Smad7 deletion and was accompanied by altered bone morphogenetic protein (BMP) signaling. At late gestation stages, TGF-β signaling was up-regulated in the differentiating retina. Smad7 mutant mice displayed an expanded optic disc with increasing of sonic hedgehog (SHH) signaling. Furthermore, loss of Smad7 led to a temporal change in retinal neurogenesis. In conclusion, our study suggests that Smad7 is essential for eye development. In addition, our data indicate that alterations in the signaling of BMP, TGF-β, and SHH likely underlie the defects in eye development caused by Smad7 deletion.