RNA interference (RNAi) has emerged as a powerful way of reducing gene function in Drosophila melanogaster tissues. By expressing synthetic short hairpin RNAs (shRNAs) using the Gal4/UAS system, knockdown is efficiently achieved in specific tissues or in clones of marked cells. Here we show that knockdown by shRNAs is so potent and persistent that even transient exposure of cells to shRNAs can reduce gene function in their descendants. When using the FLP-out Gal4 method, in some instances we observed unmarked “shadow RNAi” clones adjacent to Gal4-expressing clones, which may have resulted from brief Gal4 expression following recombination but prior to cell division. Similarly, Gal4 driver lines with dynamic expression patterns can generate shadow RNAi cells after their activity has ceased in those cells. Importantly, these effects can lead to erroneous conclusions regarding the cell autonomy of knockdown phenotypes. We have investigated the basis of this phenomenon and suggested experimental designs for eliminating ambiguities in interpretation. We have also exploited the persistence of shRNA-mediated knockdown to design a sensitive lineage-tracing method, i-TRACE, which is capable of detecting even low levels of past reporter expression. Using i-TRACE, we demonstrate transient infidelities in the expression of some cell-identity markers near compartment boundaries in the wing imaginal disc.