Special xylem tissue called “compression wood” is formed on the lower side of inclined stems when gymnosperms grow on a slope. We investigated the molecular mechanism of compression wood formation. Transcriptome analysis by next-generation sequencing (NGS) was applied to the xylem of Chamaecyparis obtusa to develop a catalog of general gene expression in differentiating xylem during compression and normal wood formation. The sequencing output generated 234,924,605 reads and 40,602 contigs (mean size = 529 bp). Based on a sequence similarity search with known proteins, 54.2% (22,005) of the contigs showed homology with sequences in the databases. Of these annotated contigs, 19,293 contigs were assigned to Gene Ontology categories. Differential gene expression between the compression and normal wood libraries was analyzed by mapping the reads from each library to the assembled contigs. In total, 2875 contigs were identified as differentially expressed, including 1207 that were up-regulated and 1668 that were down-regulated in compression wood. We selected 30 genes and compared the transcript abundance between compression and normal wood by quantitative polymerase chain reaction analysis to validate the NGS results. We found that 27 of the 30 genes showed the same expression patterns as the original NGS results.