Microbiologists have long been intrigued by the ability of parasitic organisms to adapt to changes in the environment. Since most parasites occupy several niches during their journey between vectors and hosts, they have developed adaptive responses which allow them to survive under adverse conditions. Therefore, the life cycles of protozoan and helminthic parasites are excellent models with which to study numerous mechanisms involved in cell differentiation, such as the regulation of gene expression, signal transduction pathways, and organelle biogenesis. Unfortunately, many of these studies are very difficult because the conditions needed to elicit developmental changes in parasites remain undetermined in most cases. Recently, several interesting findings were reported on the process of differentiation of Giardia lamblia trophozoites into cysts. G. lamblia is a flagellated protozoan that inhabits the upper small intestine of its vertebrate host and is a major cause of enteric disease worldwide. It belongs to the earliest identified lineage among eukaryotes and therefore offers a unique insight into the progression from primitive to more complex eukaryotic cells. The discovery of a specific stimulus that induces trophozoites to differentiate into cysts, the identification and characterization of encystation-specific molecules, the elucidation of novel biochemical pathways, and the development of useful reagents and techniques have made this parasite an excellent model with which to study differentiation in eukaryotic cells. In this review, we summarize the most recent fundings on several aspects of Giardia differentiation and discuss the significance of these findings within the context of current knowledge in the field.