Heterochromatic position-effect variegation (PEV) describes the mosaic phenotype of a euchromatic gene placed next to heterochromatin. Heterochromatin-mediated silencing has been studied extensively in Drosophila, but the lack of a ubiquitous reporter gene detectable at any stage has prevented a direct developmental characterization of this phenomenon. Current models attribute variegation to the establishment of a heritable silent state in a subset of the cells and invoke differences in the timing of silencing to explain differences in the patch size of various mosaic patterns. In order to follow the course of heterochromatic silencing directly, we have generated Drosophila lines variegating for a lacZ reporter that can be induced in virtually all cells at any developmental stage. Our data indicate that silencing begins in embryogenesis and persists in both somatic and germline lineages. A heterogeneity in the extent of silencing is also revealed; silencing is suppressed in differentiated tissues but remains widespread in larval imaginal discs containing precursor cells for adult structures. Using eye development as an example, we propose that the mosaic phenotype is determined during differentiation by a variegated relaxation in heterochromatic silencing. Though unpredicted by prevailing models, this mechanism is evident in other analogous systems.