During embryonic development, DNA binding proteins help specify and restrict the fates of pluripotent stem cells. In the developing kidney, Pax2 proteins are among the earliest markers for the renal epithelial cell lineage, with expression in the mesenchyme and in proliferating epithelia. The Pax2 protein is essential for interpreting inductive signals emanating from the ureteric bud such that the kidney mesenchyme can convert to epithelia. The biochemistry of Pax protein function is being studied in a variety of model systems. Through interactions with the adaptor Pax transactivation-domain interacting protein (PTIP), Pax proteins can recruit members of the Trithorax family of histone methyltransferases to imprint activating epigenetic marks on chromatin. However, interactions with the corepressor Groucho-related gene-4 (Grg4) protein can inhibit activation and instead recruit Polycomb repressor complexes to promote target-gene silencing. We present a model whereby the regulated interactions of Pax proteins with available cofactor-mediated activation or gene silencing at different stages of development. The implications for establishing and maintaining the epigenome are discussed.