The thyroid gland develops from two distinct embryonic lineages: follicular cells (which produce thyroxine) and parafollicular C-cells (which produce calcitonin) are of endodermal and neural crest origin, respectively. Little is known about the molecular mechanisms governing the generation of these different cell types. Mice lacking the transcription factor Ttf1 lack both cell types and thus are unable to develop a thyroid gland. By analysis of Pax8-/- mice, we demonstrate that Pax8 is required for the formation of the follicular cells in the thyroid. We present evidence that Pax8 is necessary for providing cues for the differentiation of competent endoderm primordia into thyroxin-producing follicular cells.