The hepatoma-derived hepatitis B virus (HBV) DNA insert HU-a has recently been shown to contain two viral transactivator genes, X and preS2 /S. We report here that HU-a induces malignant transformation after stable transfection of the fetal mouse hepatocyte line FMH202, as indicated by soft agar growth and nude mouse tumorigenicity. Transfections with HU-a subclones, containing the X gene of the preS2 /S gene alone or sequences without transactivator gene, respectively, suggested that the X gene is essential for transformation. Sequential stages of transformation and tumor progression were analysed by injection of the stably transfected FMH202 lines into nude mice, explanation of the resulting tumors and re-establishment of cell lines from the tumors. Comparison of two HU-a-transformed cell lines by HBV mRNA hybridization, Southern analysis and chromosomal in situ hybridization revealed that integrated HBV DNAs were involved in major chromosomal rearrangements in both cases. Interestingly, recombination of the HBV Dna insert during the nude mouse passage had completely abolished HBV-specific transcription in one case, indicating that expression of integrated HBV genes, while presumably involved in early transformation, is dispensable at later stages of tumor progression. The sequential transformation observed in this experimental system suggests that expression of the X gene by integrated viral DNA and subsequent hepatocyte genome mutations might both contribute to HBV-associated liver carcinogenesis.