During development of the Drosophila adult appendage precursors, the larval imaginal disks, the decapentaplegic (dpp) gene is expressed in a stripe just anterior to the anterior/posterior (A/P) compartment boundary. Here, we investigate the genetic controls that lead to production of this stripe. We extend previous observations on leaky engrailed (en) mutations by showing that mutant clones completely lacking both en and invected (inv) activity ectopically express dpp-lacZ reporter genes in the posterior compartment, where dpp activity ordinarily is repressed. Similarly, patched (ptc) is also ectopically expressed in such posterior compartment en-inv- null clones. In contrast, these en-inv- clones exhibit loss of hedgehog (hh) expression. We suggest that the absence of dpp expression in the posterior compartment is due to direct repression by en. Ubiquitious expression of en in imaginal disks, produced by a hs-en construct, eliminates the expression of dpp-lacZ in its normal A/P boundary stripe. We identify three in vitro Engrailed binding sites in one of our dpp-lacZ reporter gene. Mutagenesis of these Engrailed binding sites results in ectopic expression of this reporter gene, but does not alter the normal stripe of expression at the A/P boundary. We propose that the en-hh-ptc regulatory loop that is responsible for segmental expression of wingless in the embryo is reutilized in imaginal disks to create a stripe of dpp expression along the A/P compartment boundary.