Retinoic acid induced 1 (RAI1) is among the 20 genes identified in the critical region of Smith-Magenis syndrome (SMS), a genomic disorder with multiple congenital anomalies associated with a 3.7 Mb heterozygous deletion of 17p11.2. Heterozygous premature termination mutations in RAI1 have been identified recently in SMS patients without detectable deletions. To investigate Rai1 function, we generated a null allele in mice by gene targeting and simultaneously inserted a lacZ reporter gene into the Rai1 locus. X-gal staining of the Rai1(+/-) mice recapitulated the endogenous expression pattern of Rai1. The gene was predominantly expressed in the epithelial cells involved in organogenesis. Obesity and craniofacial abnormalities, which have been reported in SMS mouse models containing a heterozygous deletion of the syntenic SMS critical region, were observed in Rai1(+/-) mice. Thus, haploinsufficiency of Rai1 causes obesity and craniofacial abnormalities in mice. Interestingly, the penetrance of craniofacial anomalies is further reduced in Rai1(+/-) mice. Most homozygous mice died during gastrulation and organogenesis. The surviving Rai1(-/-) mice were growth retarded and displayed malformations in both the craniofacial and the axial skeleton. Using green fluorescence protein and GAL4 DNA binding domain fusions to Rai1, we showed that Rai1 is translocated to the nucleus and it has transactivation activity. Our data are consistent with Rai1 functioning as a transcriptional regulator, document that Rai1 haploinsufficiency is responsible for obesity and craniofacial phenotypes in mice with SMS deletions, and indicate Rai1 is important for embryonic and postnatal developments.