The diencephalon is the embryonic precursor to the caudal forebrain. The major diencephalic derivative is the thalamus, which functions as a relay station between the cortex and lower nervous system structures. Although the diencephalon has been recognized as a vital brain region, our understanding of its development remains superficial. In this review, we discuss recent progresses in understanding one essential aspect of diencephalic development, diencephalic patterning. Signaling centers identified in the zona limitans intrathalamica and along the dorsal and ventral midlines have emerged as essential organizers in diencephalic patterning. The cumulative data reveal that the diencephalon shares some developmental principles with more caudal brain regions, whereas other mechanisms are unique to this region.