The methylation status of hepatitis B virus (HBV) DNA was investigated in different organs from two strains of transgenic mice (E36 and E11) expressing the hepatitis B surface antigen (HBsAg) gene specifically in the liver. Specific sites in the S gene were shown to be methylated in all the organs of adult mice except in the liver. These sites were methylated in 14-day-old fetal liver and were progressively demethylated during development and after birth. In one strain in which HBsAg expression is lost upon transmission by females, extensive de novo methylation of the transgene was detected in the livers and bodies of 14-day-old fetuses from transgenic females. The extent of methylation was such that activation of the gene was no longer possible. DNase I-hypersensitive sites were detected in the enhancer region of HBV in the liver of HBsAg-positive mice but not in HBsAg-negative progeny of E36 females. These data indicated that in two independent transgenic lines, HBV sequences are reproducibly activated in the developing liver along with cellular liver-specific genes and that transcription is associated with demethylation at specific sites in the S gene and with DNase hypersensitivity.