Within the context of the developing embryo, restrictions in cell lineage potential occur through cell-cell interactions and signaling molecules, leading to changes in genetic programs and to the emergence of disparate tissues containing functionally distinct cell types including somatic stem cells. Tissue maintenance in the adult is thought to occur through specific stem cells, and in the case of the hematopoietic system, through hematopoietic stem cells (HSCs). These cells arise in midgestation within the region of the embryo containing the dorsal aorta, gonads, and mesonephros (AGM) and are thought to maintain a distinct hematopoietic lineage-restricted fate. However, recent transplantation experiments suggest that within the adult, HSCs previously thought to be restricted can, under certain circumstances, display unexpected lineage potentials. With these surprising and controversial results, it is becoming apparent that a better understanding of the developmental processes, molecular programs and lineage relationships leading to the emergence of adult stem cells will provide insight into the incremental steps involved in lineage determination, and perhaps possibilities for the manipulated differentiation of stem cells. The most widely studied, accessible stem cell and cellular differentiation hierarchy is that of the hematopoietic system. With the issue of stem cell potential in the forefront, the focus of this review is on the development of the hematopoietic system: how HSCs arise in the embryo, the lineage relationships of hematopoietic cells as they are generated, and the identification of precursor cells fated to the hematopoietic lineage throughout ontogeny.