Induction, neurogenesis, and synaptogenesis of the olfactory bulb are thought to require interactions with the olfactory epithelium. TheDlx family of homeobox genes is expressed in both the olfactory bulb and olfactory epithelium. In particular,Dlx5 is expressed in the olfactory placode, olfactory epithelium, and local circuit neurons of the olfactory bulb. Here we analyzed mice lacking DLX5 function. TheDlx5^−/− mutation reduces the size of the olfactory epithelium. Although some olfactory neurons are formed, they fail to generate olfactory axons that innervate the olfactory bulb. Despite the lack of innervation, the olfactory bulb forms, and neurogenesis of projection and local circuit neurons proceeds. However, the mutation has a cell-autonomous effect on the ability of neural progenitors to produce olfactory bulb local circuit neurons, with granule cells more severely affected than periglomerular cells. In addition, the mutation has a noncell-autonomous effect on the morphogenesis of mitral cells.