The development of a complex, multicellular organ, such as the kidney, from two embryonic progenitor tissues requires the activation and suppression of transcription factors that regulate tissue and cell type-specific gene expression. From areas as diverse as fruit fly development and human cancer genetics, a number of important genes have been identified that help to orchestrate the early events of renal epithelium induction and differentiation. The Wilms' tumor-suppressor gene WT1 is critical for regulating the early response of the kidney mesenchyme to induction and may play multiple roles during the course of renal epithelial cell development and tumor formation. The Pax-2 gene is activated in the mesenchyme after induction and is necessary for condensation and perhaps proliferation of the induced cells. How these two important gene products exert their effects will be discussed in light of recent evidence on DNA binding, transcription repression, and protein interactions.