Chromatin structure at Schizosaccharomyces pombe centromeres is unusual. The insertion of the ura4 gene within these centromeres resulted in genetically identical cells mosaic for its expression. Placement of the ade6 gene within cen1 or cen3 resulted in red-white sectored colonies, demonstrating the instability of gene expression. The occurrence of pink colonies implied that intermediate levels of repression were established. Repression of both genes within centromeres was temperature sensitive. The chromatin structure of the ura4 gene at centromeres was altered, suggesting that the unusual chromatin encroaches into the gene and inhibits normal expression. These repressive effects at S. pombe centromeres resemble the classical phenomenon of position effect variegation imposed by Drosophila heterochromatin on nearby genes. However, since the epigenetic states can be set at intermediate levels of expression, a purely euchromatin-heterochromatin dichotomy does not apply. A model for the epigenetic regulation of genes placed within S. pombe centromeres is presented.