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How is the remarkable cellular diversity in the nervous system established during development? Do cells assume specific fates as a consequence of intrinsic factors, or are they acquired through cellular interactions? Cell lineage studies provide a way to distinguish between these two extreme mechanistic alternatives. For instance, lineage studies in the vertebrate central nervous system (CNS) reveal that at late stages of development pluripotent cells exist within the neuroepithelium that give rise to different neuronal and glial cell types (e.g. Turner & Cepko 1987). Qualitatively similar results were obtained from genetic mosaic studies carried out some 20 years ago, which showed that there were no strict lineage relationships between different classes of neurons and support cells in the compound eye of Drosophila melanogaster (Ready et al 1976, Lawrence & Green 1979). In the absence of lineage, a prominent role for cellular interactions in regulating the development of both the fly eye and the vertebrate CNS has been proposed. In recent years considerable progress has been made in understanding the mechanisms by