Hepatitis B virus (HBV) transgenic mice whose hepatocytes replicate the virus at levels comparable to that in the infected livers of patients with chronic hepatitis have been produced, without any evidence of cytopathology. High-level viral gene expression was obtained in the liver and kidney tissues in three independent lineages. These animals were produced with a terminally redundant viral DNA construct (HBV 1.3) that starts just upstream of HBV enhancer I, extends completely around the circular viral genome, and ends just downstream of the unique polyadenylation site in HBV. In these animals, the viral mRNA is more abundant in centrilobular hepatocytes than elsewhere in the hepatic lobule. High-level viral DNA replication occurs inside viral nucleocapsid particles that preferentially form in the cytoplasm of these centrilobular hepatocytes, suggesting that an expression threshold must be reached for nucleocapsid assembly and viral replication to occur. Despite the restricted distribution of the viral replication machinery in centrilobular cytoplasmic nucleocapsids, nucleocapsid particles are detectable in the vast majority of hepatocyte nuclei throughout the hepatic lobule. The intranuclear nucleocapsid particles are empty, however, suggesting that viral nucleocapsid particle assembly occurs independently in the nucleus and the cytoplasm of the hepatocyte and implying that cytoplasmic nucleocapsid particles do not transport the viral genome across the nuclear membrane into the nucleus during the viral life cycle. This model creates the opportunity to examine the influence of viral and host factors on HBV pathogenesis and replication and to assess the antiviral potential of pharmacological agents and physiological processes, including the immune response.