The inner ear develops from the otic placode, one of the cranial placodes that arise from a region of ectoderm adjacent to the anterior neural plate called the pre-placodal domain. We have identified a Forkhead family transcription factor, Foxi3, that is expressed in the pre-placodal domain and down-regulated when the otic placode is induced. We now show that Foxi3 mutant mice do not form otic placodes as evidenced by expression changes in early molecular markers and the lack of thickened placodal ectoderm, an otic cup or otocyst. Some preplacodal genes downstream of Foxi3 - Gata3, Six1 and Eya1 - are not expressed in the ectoderm of Foxi3 mutant mice, and the ectoderm exhibits signs of increased apoptosis. We also show that Fgf signals from the hindbrain and cranial mesoderm, which are necessary for otic placode induction, are received by pre-placodal ectoderm in Foxi3 mutants, but do not initiate otic induction. Finally, we show that the epibranchial placodes that develop in close proximity to the otic placode and the mandibular division of the trigeminal ganglion are missing in Foxi3 mutants. Our data suggest that Foxi3 is necessary to prime pre-placodal ectoderm for the correct interpretation of inductive signals for the otic and epibranchial placodes.