Ssm1 is responsible for the mouse strain-specific DNA methylation of the transgene HRD. In adult mice of the C57BL/6 (B6) strain, the transgene is methylated at essentially all CpGs. However, when the transgene is bred into the DBA/2 (D2) strain, it is almost completely unmethylated. Strain-specific methylation arises during differentiation of embryonic stem (ES) cells. Here we show that Ssm1 causes striking chromatin changes during the development of the early embryo in both strains. In undifferentiated ES cells of both strains, the transgene is in a chromatin state between active and inactive. These states are still observed 1 week after beginning ES cell differentiation. However, 4 weeks after initiating differentiation, in B6, the transgene has become heterochromatic, and in D2, the transgene has become euchromatic. HRD is always expressed in D2, but in B6, it is expressed only in early embryos. The transgene is already more methylated in B6 ES cells than in D2 ES cells and becomes increasingly methylated during development in B6, until essentially all CpGs in the critical guanosine phosphoribosyl transferase core are methylated. Clearly, DNA methylation of HRD precedes chromatin compaction and loss of expression, suggesting that the B6 form of Ssm1 interacts with DNA to cause strain-specific methylation that ultimately results in inactive chromatin.