To investigate the activity of candidate regulatory molecules in mammalian embryogenesis, we have developed a general strategy for modifying and reporting resident chromosomal gene expression. The picornaviral internal ribosome-entry site was incorporated into gene targeting constructs to provide cap-independent translation of a selectable marker from fusion transcripts generated following homologous recombination. These promoterless constructs were highly efficient and have been used both to inactivate the stem-cell-specific transcription factor Oct-4 and to introduce a quantitative regulatory modification into the gene for a stem-cell maintenance factor, differentiation-inhibiting activity. In addition, the inclusion of a beta-galactosidase reporter gene in the constructs enabled accurate and sensitive detection of cellular sites of transcription. This has allowed visualization of putative "stem-cell niches" in which sources of elevated expression of differentiation-inhibiting activity were localized to the differentiated cells surrounding colonies of stem cells.