The otocyst is the epithelial anlage of the membranous labyrinth which interacts with surrounding cephalic mesenchyme to form an otic capsule. A series of in vitro studies was performed to gain a better understanding of the epithelial-mesenchymal interactions involved in this process. Parallel series of otocyst/mesenchyme (O/M) and isolated periotic mesenchyme (M) explants provided morphological and biochemical data to define the role of the otocyst in organizing and directing formation of its cartilaginous otic capsule. Explants were made from mouse embryos ranging in age from 10 to 14 days of gestation, and organ cultured under identical conditions until the chronological equivalent of 16 days of gestation. Expression of chondrogenesis was determined by both histology and biochemistry. The in vitro behaviour of periotic mesenchyme explanted either with or without an otocyst supports several hypotheses that explain aspects of otic capsule development. The results indicate that prior to embryonic day 12 the otocyst alone is not sufficient to stimulate chondrogenesis of the otic capsule within O/M explants; the otocyst acts as an inductor of capsule chondrogenesis within O/M explants between embryonic days 12 to 13; isolated mesenchyme within M explants taken from 13-day-old embryos are capable of initiating in vitro chondrogenesis, but without expressing capsule morphology in the absence of the otocyst; and the isolated mesenchyme of M explants obtained from 14-day-old embryos expresses both chondrogenesis and otic capsule morphology in the absence of the otocyst. These findings suggest that the otocyst acts as an inductor of chondrogenesis of periotic mesenchyme tissue between embryonic days 11 to 13, and controls capsular morphogenesis between embryonic days 13 to 14 in the mouse embryo.