Sensory hair cells and their associated non-sensory supporting cells in the inner ear are fundamental for hearing and balance. They arise from a common progenitor, but little is known about the molecular events specifying this cell lineage. We recently identified two allelic mouse mutants, light coat and circling (Lcc) and yellow submarine (Ysb), that show hearing and balance impairment. Lcc/Lcc mice are completely deaf, whereas Ysb/Ysb mice are severely hearing impaired. We report here that inner ears of Lcc/Lcc mice fail to establish a prosensory domain and neither hair cells nor supporting cells differentiate, resulting in a severe inner ear malformation, whereas the sensory epithelium of Ysb/Ysb mice shows abnormal development with disorganized and fewer hair cells. These phenotypes are due to the absence (in Lcc mutants) or reduced expression (in Ysb mutants) of the transcription factor SOX2, specifically within the developing inner ear. SOX2 continues to be expressed in the inner ears of mice lacking Math1 (also known as Atoh1 and HATH1), a gene essential for hair cell differentiation, whereas Math1 expression is absent in Lcc mutants, suggesting that Sox2 acts upstream of Math1.