The yolk sac is the first site of hematopoiesis during mammalian development. The yolk sac is also the first site of blood vessel development. Development of the blood islands in the yolk sac is an integrated process in which these two developmental events, hematopoiesis and vasculogenesis, proceed in concert. This review focuses on mouse yolk sac hematopoietic stem cells (YS-HSC), describing their differentiation in vitro and in vivo. YS-HSC go through a progressive series of changes prior to the initiation of lineage-specific differentiation. Experiments tracing their origins from postulated hemangioblasts, and the subsequent interaction between these stem cells and yolk sac endothelial cells are described. Differences between the extraembryonic YS-HSC and HSC found later within the embryo, perinatally or in adults, are described. YS-HSC have greater reproductive capability than HSC obtained from fetal liver, umbilical cord blood or adult bone marrow; they do not yet express major histocompatibility complex-associated antigens and they are able to reconstitute adult immunocompromised animals even when introduced in small numbers (< 100 cells/mouse). With recent results demonstrating the feasibility of expanding YS-HSC in vitro as well as of introducing new genes into these cells by transfection, the YS-HSC shows promise both as a means of achieving long-term restitution of hematopoiesis across histocompatibility barriers and as a self-renewing vehicle for gene transfer.