The random insertion of transgenes into the genomic DNA of mice usually leads to widely variable levels of expression in individual founder lines. To study the mechanisms that cause variegation, we designed a transgene that we expected to variegate, which consisted of a beta-globin locus control region 5' HS-2 linked in tandem to a tagged human beta-globin gene (into which a Lac-Z cassette had been inserted). All tested founder lines exhibited red blood cell-specific expression, but levels of expression varied >1000-fold from the lowest to the highest expressing line. Most of the variation in levels of expression appeared to reflect differences in the percentage of cells in the peripheral blood that expressed the transgene, which ranged from 0.3% in the lowest expressing line to 88% in the highest; the level of transgene expression per cell varied no more than 10-fold from the lowest to the highest expressing line. These differences in expression levels could not be explained by the location of transgene integration, by an effect of beta-galactosidase on red blood cell survival, by the half life of the beta-galactosidase enzyme or by the age of the animals. The progeny of all early erythroid progenitors (BFU-E colony-forming cells) exhibited the same propensity to variegate in methylcellulose-based cultures, suggesting that the decision to variegate occurs after the BFU-E stage of erythroid differentiation. Collectively, these data suggest that variegation in levels of transgene expression are due to local, integration site-dependent phenomena that alter the probability that a transgene will be expressed in an appropriate cell; however, these local effects have a minimal impact on the transgene's activity in the cells that initiate transcription.