To wrap this up (hopefully!), I received a few responses from SQL MVPs from one of the SQL newsgroups.

The consensus was that no one expected variables could be scoped in a BEGIN...END block (yet also acknowledged that BOL indicates otherwise). One person stated he might contact MS about this.

The general recommendation (no surprise) was to declare local variables at the top of the procedure.

In addition to Bonnie's test, someone also demonstrated that declaring the same local variable inside two different BEGIN...END blocks generated an error that the variable had already been declared.

So it seems that variables inside a BEGIN...END block are created regardless. At the very least (IMHO), the docs could be a little clearer about this, and should more consistently state the actual scope.

Kevin