Position-effect variegation (PEV) was discovered in 1930 in a study of X-ray-induced chromosomal rearrangements. Rearrangements that place euchromatic genes adjacent to a region of centromeric heterochromatin give a variegated phenotype that results from the inactivation of genes by heterochromatin spreading from the breakpoint. PEV can also result from P element insertions that place euchromatic genes into heterochromatic regions and rearrangements that position euchromatic chromosomal regions into heterochromatic nuclear compartments. More than 75 years of studies of PEV have revealed that PEV is a complex phenomenon that results from fundamental differences in the structure and function of heterochromatin and euchromatin with respect to gene expression. Molecular analysis of PEV began with the discovery that PEV phenotypes are altered by suppressor and enhancer mutations of a large number of modifier genes whose products are structural components of heterochromatin, enzymes that modify heterochromatic proteins, or are nuclear structural components. Analysis of these gene products has led to our current understanding that formation of heterochromatin involves specific modifications of histones leading to the binding of particular sets of heterochromatic proteins, and that this process may be the mechanism for repressing gene expression in PEV. Other modifier genes produce products whose function is part of an active mechanism of generation of euchromatin that resists heterochromatization. Current studies of PEV are focusing on defining the complex patterns of modifier gene activity and the sequence of events that leads to the dynamic interplay between heterochromatin and euchromatin.