Soggy (Sgy) and Tead2, two closely linked genes with CpG islands, were coordinately expressed in mouse preimplantation embryos and embryonic stem (ES) cells but were differentially expressed in differentiated cells. Analysis of established cell lines revealed that Sgy gene expression could be fully repressed by methylation of the Sgy promoter and that DNA methylation acted synergistically with chromatin deacetylation. Differential gene expression correlated with differential DNA methylation, resulting in sharp transitions from methylated to unmethylated DNA at the open promoter in both normal cells and tissues, as well as in established cell lines. However, neither promoter was methylated in normal cells and tissues even when its transcripts were undetectable. Moreover, the Sgy promoter remained unmethylated as Sgy expression was repressed during ES cell differentiation. Therefore, DNA methylation was not the primary determinant of Sgy/Tead2 expression. Nevertheless, Sgy expression was consistently restricted to basal levels whenever downstream regulatory sequences were methylated, suggesting that DNA methylation restricts but does not regulate differential gene expression during mouse development.