Covalent modifications of histones index structurally and functionally distinct chromatin domains in eukaryotic nuclei. Drosophila with its polytene chromosomes and developed genetics allows detailed cytological as well as functional analysis of epigenetic histone modifications involved in the control of gene expression pattern during development. All H3K9 mono- and dimethylation together with all H3K27 methylation states and H4K20 trimethylation are predominant marks of pericentric heterochromatin. In euchromatin, bands and interbands are differentially indexed. H3K4 and H3K36 methylation together with H3S10 phosphorylation are predominant marks of interband regions whereas in bands different H3K27 and H4K20 methylation states are combined with acetylation of H3K9 and H3K14. Genetic dissection of heterochromatic gene silencing in position-effect variegation (PEV) by Su(var) and E(var) mutations allowed identification and functional analysis of key factors controlling the formation of heterochromatin. SU(VAR)3-9 association with heterochromatic sequences followed by H3K9 methylation initiates the establishment of repressive SU(VAR)3-9/HP1/SU(VAR)3-7 protein complexes. Differential enzymatic activities of novel point mutants demonstrate that the silencing potential of SU(VAR)3-9 is mainly determined by the kinetic properties of the HMTase reaction. In Su(var)3-9ptn a significantly enhanced enzymatic activity results in H3K9 hypermethylation, enhanced gene silencing and extensive chromatin compaction. Mutations in factors controlling active histone modification marks revealed the dynamic balance between euchromatin and heterochromatin. Further analysis and definition of Su(var) and E(var) genes in Drosophila will increase our understanding of the molecular hierarchy of processes controlling higher-order structures in chromatin.