We have analyzed the human B-cell tumors that arise spontaneously in SCID mice who have been given transplants of peripheral blood lymphocytes from Epstein-Barr virus (EBV)-seropositive donors to determine if patterns of EBV gene expression are correlated with phenotypic changes in the tumor B cells. Tumor cells were separated into two B-cell subsets by cell sorting on the basis of differential coexpression of membrane CD23 and CD38. One subset showed intermediate levels of CD23 and CD38 expression (CD23intCD38int), while a second subset had low-level CD23 but high-level CD38 expression (CD23loCD38hi). The CD23intCD38int cells had a high proliferative index and secreted little immunoglobulin in vitro; the CD23loCD38hi cells had a low proliferative index and high-level immunoglobulin secretion. We next analyzed the sorted cells for viral transcripts associated with latency (EBNA-1, EBNA-2, and LMP-1) or lytic cycle replication (ZEBRA and gp350 envelope protein). Only latent cycle transcripts were found in CD23intCD38int cells, whereas lytic cycle transcripts and transforming virus were present in the CD23loCD38hi cells. Finally, we generated short-term cell lines from the sorted CD23intCD38int cells and transferred these cells to SCID recipients. The resulting secondary tumors were predominantly CD23loCD38hi, suggesting that the CD23intCD38int lymphoblastoid cells are precursors to the well-differentiated, plasmacytoid CD23loCD38hi cells. These observations are discussed in the context of a three-step model for EBV-associated lymphomagenesis in humans.