In sensory circuits of the brain, developmental changes in the expression and modulation of voltage-gated ion channels are a common occurrence, but such changes are often difficult to assign to clear functional roles. We have explored this issue in the binaural neurons of the medial superior olive (MSO), whose temporal precision in detecting the coincidence of binaural inputs dictates the resolution of azimuthal sound localization. We show that in MSO principal neurons of gerbils during the first week of hearing, a hyperpolarization-activated current (I(h)) progressively undergoes a 13-fold increase in maximal conductance, a >10-fold acceleration of kinetics, and, most surprisingly, a 30 mV depolarizing shift in the voltage dependence of activation. This period is associated with an upregulation of the hyperpolarization-activated and cyclic nucleotide-gated (HCN) channel subunits HCN1, HCN2, and HCN4 in the MSO, but only HCN1 and HCN4 were expressed strongly in principal neurons. I(h) recorded in nucleated patches from electrophysiologically mature MSO neurons (>P18) exhibited kinetics and an activation range nearly identical to the I(h) found in whole-cell recordings before hearing onset. These results indicate that the developmental changes in I(h) in MSO neurons can be explained predominantly by modulation from diffusible intracellular factors, and not changes in channel subunit composition. The exceptionally large modulatory changes in I(h), together with refinements in synaptic properties transform the coding strategy from one of summation and integration to the submillisecond coincidence detection known to be required for transmission of sound localization cues.