A combination of broadly expressed transcriptional activators and spatially restricted repressors are used to pattern embryos into cells of different fate. Transcriptional co-regulators are essential mediators of transcription factor function, and contribute to selective transcriptional responses in embryo development. A two step mechanism of transcriptional regulation is discussed, where remodeling of chromatin is initially required, followed by stimulation of recruitment or release of RNA polymerase from the promoter. Transcriptional co-regulators are essential for both of these steps. In particular, most co-activators are associated with histone acetylation and co-repressors with histone deacetylation. In the early Drosophila embryo, genome-wide studies have shown that the CBP co-activator has a preference for associating with some transcription factors and regulatory regions. The Groucho, CtBP, Ebi, Atrophin and Brakeless co-repressors are selectively used to limit zygotic gene expression. New findings are summarized which show that different co-repressors are often utilized by a single repressor, that the context in which a co-repressor is recruited to DNA can affect its activity, and that co-regulators may switch from co-repressors to co-activators and vice versa. The possibility that co-regulator activity is regulated and plays an instructive role in development is discussed as well. This review highlights how findings in Drosophila embryos have contributed to the understanding of transcriptional regulation in eukaryotes as well as to mechanisms of animal embryo patterning.