Phenotypic variation in mammals is frequently attributed to the action of quantitative trait loci (QTL) or the environment, but may also be epigenetic in origin. Here we consider a mechanism for phenotypic variation based on interference of transcription by somatically active retrotransposons. Transcriptionally competent retrotransposons may number in the tens of thousands in mammalian genomes. We propose that silencing of retrotransposons occurs by cosuppression during early embryogenesis, but that this process is imperfect and produces a mosaic pattern of retrotransposon expression in somatic cells. Transcriptional interference by active retrotransposons perturbs expression of neighboring genes in somatic cells, in a mosaic pattern corresponding to activity of each retrotransposon. The epigenotype of retrotransposon activity is reset in each generation, but incomplete resetting can lead to heritable epigenetic effects. The stochastic nature of retrotransposon activity, and the very large number of genes that may be affected, produce subtle phenotypic variations even between genetically identical individuals, which may affect disease risk and be heritable in a non-mendelian fashion.