The cranial sensory ganglia, in contrast to those of the trunk, have a dual embryonic origin arising from both neurogenic placodes and neural crest. Neurogenic placodes are focal thickenings of ectoderm, found exclusively in the head of vertebrate embryos. These structures can be split into two groups based on the positions that they occupy within the embryo, dorsolateral and epibranchial. The dorsolateral placodes develop alongside the central nervous system, while the epibranchial placodes are located close to the top of the clefts between the branchial arches. Importantly, previous studies have shown that the neurogenic placodes form under the influence of the surrounding cranial tissues. In this paper, we have analysed the nature of the inductive signal underlying the formation of the epibranchial placodes. We find that epibranchial placodes do not require neural crest for their induction, but rather that it is the pharyngeal endoderm that is the source of the inductive signal. We also find that, while cranial ectoderm is competent to respond to this inductive signal, trunk ectoderm is not. We have further identified the signalling molecule Bmp7 as the mediator of this inductive interaction. This molecule is expressed in a manner consistent with it playing such a role and, when added to ectoderm explants, it will promote the formation of epibranchial neuronal cells. Moreover, the Bmp7 antagonist follstatin will block the ability of pharyngeal endoderm to induce placodal neuronal cells, demonstrating that Bmp7 is required for this inductive interaction. This work answers the long standing question regarding the induction of the epibranchial placodes, and represents the first elucidation of an inductive mechanism, and a molecular effector, underlying the formation of any primary sensory neurons in higher vertebrates.