The molecular mechanisms underlying the specification of sensory organs in the inner ear and the development of hair and supporting cells within these organs are described. The different organs are all derived from a common pro-sensory region, and may be specified by their proximity to the boundaries between compartments - broad domains within the otocyst defined by the asymmetric expression patterns of transcription factors. Activation of Notch may specify the pro-sensory region, and lateral inhibition mediated by Notch signalling influences whether cells of common lineage in a sensory patch differentiate as either hair cells or supporting cells. The transcription factors Math1 and Brn3.1 are required for hair cell differentiation, and supporting cells express negative regulators of neurogenesis, Hes1 and Hes5. Retinoic acid and thyroid hormone influence early aspects and timing of hair cell differentiation, respectively. Development of the hair cell's mechanosensory hair bundle involves interactions between the cytoskeleton, cell-surface adhesion molecules, receptors and associated extracellular matrix.