In the vertebrate head, the peripheral components of the sensory nervous system are derived from two embryonic cell populations, the neural crest and cranial sensory placodes. Both arise in close proximity to each other at the border of the neural plate: neural crest precursors abut the future central nervous system, while placodes originate in a common preplacodal region slightly more lateral. During head morphogenesis, complex events organise these precursors into functional sensory structures, raising the question of how their development is coordinated. Here we review the evidence that neural crest and placode cells remain in close proximity throughout their development and interact repeatedly in a reciprocal manner. We also review recent controversies about the relative contribution of the neural crest and placodes to the otic and olfactory systems. We propose that a sequence of mutual interactions between the neural crest and placodes drives the coordinated morphogenesis that generates functional sensory systems within the head.