The study of transgenic and gene-deleted (knockout) mice provides important insights into the in vivo function and interaction of specific gene products. Within the pharmaceutical industry, genetically altered mice are used predominantly in discovery research to characterize the diverse functions of one or multiple gene products or to establish animal models of human disease for proof-of-concept studies. We recently used genetically altered animals in drug discovery to examine the NF-kappaB family of transcriptional regulatory genes and to elucidate their essential role in the early onset of immune and inflammatory responses. Transgenic and knockout mice are also useful in drug development, because questions regarding risk assessment and carcinogenesis, xenobiotic metabolism, receptor- and ligand-mediated toxicity, and immunotoxicity can be evaluated using these genetically altered mice. For example, the p53 knockout mouse is one of several genetically altered mice whose use may increase the sensitivity and decrease the time and cost of rodent carcinogenicity bioassays. As with any experimental model system, data obtained from genetically altered mice must be interpreted carefully. The complete inactivation of a gene may result in altered expression of related genes or physiologic compensation for the loss of the gene product. Consideration must also be given to the genetic background of the mouse strain and the impact of strain variability on disease or toxicity models. Despite these potential limitations, knockout mice provide a powerful tool for the advancement of drugs in the pharmaceutical industry.