Several basic helix-loop-helix (bHLH) genes have been shown to be essential for the generation of the auditory sensory hair cells or the spiral ganglion (SG) neurons that innervate the hair cells in the cochlea, as well as a variety of cell types in the other nervous systems. However, it remains elusive what cellular context-dependent mechanisms confer the inner ear-specific neuronal or sensory competency/identities. We explored the possibility that one of the mechanisms responsible for generating cellular diversity in the nervous system through cooperative action of bHLH and LIM-homeodomain (LIM-HD) transcriptional factors might also contribute to the inner ear-specific sensory and/or neuronal competency. Here, we show that Islet1 (Isl1), a LIM-HD protein, is expressed early in the otocyst in the region that gives rise to both the auditory sensory organ, the organ of Corti, and SG neurons. Subsequently, the expression of Isl1 is maintained in SG neurons but is transitory in the sensory lineage. At embryonic day 12 (E12) in mice, the expression of Isl1 marks distinctively the ventral portion of the nascent cochlear epithelium encompassing the primordial organ of Corti. At E13, Isl1 is maintained at relatively high levels in the sensory primordium while down-regulated in the other regions of the cochlear duct. As the sensory epithelium starts to differentiate, it is down-regulated in the entire cochlear epithelium. The expression of Isl1 in the developing inner ear reveals an early and likely a common step in the development of both sensory and neuronal lineages of the inner ear, and suggests its potential role in the inner ear-specific sensory and neuronal cell development.