In Drosophila embryos, boundaries of lineage restriction separate groups of cells, or compartments. Engrailed is essential for specification of the posterior compartment of each segment, and its expression is thought to mark this compartment. Using a new photo-activatable lineage tracer, we followed the progeny of single embryonic cells marked at the blastoderm stage. No clones straddled the anterior edges of engrailed stripes (the parasegment border). However, posterior cells of each stripe lose engrailed expression, producing mixed clones. We suggest that stable expression of engrailed by cells at the anterior edge of the stripe reflects, not cell-intrinsic mechanisms, but proximity to cells that produce Wingless, an extracellular signal needed for maintenance of engrailed expression. If control of posterior cell fate parallels control of engrailed expression, cell fate is initially responsive to cell environment and cell fate determination is a later event.