The vertebrate inner ear consists of a complex labyrinth of epithelial cells that is surrounded by a bony capsule. The molecular mechanisms coordinating the development of the membranous and bony labyrinths are largely unknown. Previously, using avian retrovirus encoding Noggin (RCAS-Noggin) or beads soaked with Noggin protein, we have shown that bone morphogenetic proteins (BMPs) are important for the development of the otic epithelium in the chicken inner ear. Here, using two additional recombinant avian retroviruses, dominant negative and constitutively active forms of BMP receptors IB (BMPRIB), we show that BMPs, possibly acting through BMPRIB, are important for otic capsule formation. We also show that Bmp2 is strongly expressed in the prospective semicircular canals starting from the canal outpouch stage, suggesting that BMP2 plays an important role in canal formation. In addition, by correlating expression patterns of Bmps, their receptors, and localization of phosphorylated R-Smad (phospho R-Smad) immunoreactivity, an indicator of BMP activation, we show that BMPs emanating from the otic epithelium influence chondrogenesis of the otic capsule including the cartilage surrounding the semicircular canals.