Drosophila imaginal discs are divided into units called compartments. Cells belonging to the same compartment are related by lineage and express a characteristic set of 'selector genes'. The borders between compartments act as organizing centres that influence cell growth within compartments. Thus, in the cells immediately anterior to the anterior-posterior compartment boundary the presence of the hedgehog product causes expression of decapentaplegic, which, in turn, influences the growth and patterning of the wing disc. The normal growth of the disc requires that posterior-specific genes, such as hedgehog and engrailed are not expressed in cells of the anterior compartment. Here we show that hedgehog can activate engrailed in the anterior compartment and that both hedgehog and engrailed are specifically repressed in anterior cells by the activity of the neurogenic gene groucho. In groucho mutant discs, hedgehog and engrailed are expressed at the dorsoventral boundary of the anterior compartment, leading to the ectopic activation of decapentaplegic and patched and to a localised increase in cell growth associated with pattern duplications. The presence of engrailed in the anterior compartment causes the transformation of anterior into posterior structures.