In Drosophila embryos, segment boundaries form at the posterior edge of each stripe of engrailed expression. We have used an HRP-CD2 transgene to follow by transmission electron microscopy the cell shape changes that accompany boundary formation. The first change is a loosening of cell contact at the apical side of cells on either side of the incipient boundary. Then, the engrailed-expressing cells flanking the boundary undergo apical constriction, move inwards and adopt a bottle morphology. Eventually, grooves regress, first on the ventral side, then laterally. We noted that groove formation and regression are contemporaneous with germ band retraction and shortening, respectively, suggesting that these rearrangements could also contribute to groove morphology. The cellular changes accompanying groove formation require that Hedgehog signalling be activated, and, as a result, a target of Ci expressed, at the posterior of each boundary (obvious targets like stripe and rhomboid appear not to be involved). In addition, Engrailed must be expressed at the anterior side of each boundary, even if Hedgehog signalling is artificially maintained. Thus, there are distinct genetic requirements on either side of the boundary. In addition, Wingless signalling at the anterior of the domains of engrailed (and hedgehog) expression represses groove formation and thus ensures that segment boundaries form only at the posterior.