The inner ear, also called the membranous labyrinth, contains the cochlea, which is responsible for the sense of hearing, and the vestibular apparatus, which is necessary for the sense of balance and gravity. The inner ear arises in the embryo from placodes, which are epithelial thickenings of the cranial ectoderm symmetrically located on either side of hindbrain rhombomeres 5 and 6. Placode formation in mice is first visible at the 12-somite stage and is controlled by surrounding tissues, the paraxial mesoderm and neural ectoderm. Diffusible molecules such as growth factors play an important role in this process. The activity of several genes confers the identity to the placodal cells. Subsequent cellular proliferation processes under influences from the adjacent hindbrain cause the inner ear epithelium to invaginate and form a vesicle called the otocyst. Combinatorial expression of several genes and diffusible factors secreted from the vesicle epithelium and hindbrain control specification of distinct inner ear compartments. Transplantation studies and inner ear in vitro cultures show that each of these compartments is already committed to develop unique inner ear structures. Later developmental periods are principally characterized by intrinsic differentiation processes. In particular, sensory patches differentiate into fully functional sensory epithelia, and the semicircular canals along with the cochlear duct are elaborated and ossified.