Extracellular modulators of cell–cell signaling control numerous aspects of organismal development. The Twisted gastrulation (Twsg1) gene product is a small, secreted cysteine-rich protein that has the unusual property of being able to either enhance or inhibit signaling by the bone morphogenetic protein (BMP) subfamily of TGF-β type factors in a context-dependent manner. In this report, we characterize the early embryonic and skeletal phenotypes associated with loss of Twsg1 function in mice. All Twsg1 mutant mice, irrespective of genetic background, exhibit deletions of neural arches in the cervical vertebrae. In a C57BL/6 background, we also observe pronounced forebrain defects including rostral truncations, holoprosencephaly, cyclopia, as well as alterations in the first branchial arch (BA1) leading to lack of jaw (agnathia). Characterization of marker expression suggests that these defects are attributable to loss of signaling from forebrain-organizing centers including Fgf8 from the anterior neural ridge (ANR) and Shh from the prechordal plate (PrCP). In addition, we find defects in the foregut endoderm and a reduction in Hex expression, which may contribute to both the forebrain and BA1 defects.