Direct sequencing of polymerase chain reaction-amplified serum hepatitis B virus (HBV) DNA was used to characterize the precore region of HBV from Chinese patients with chronic hepatitis. Two types of mutually exclusive variants were found in hepatitis B e antigen (HBeAg)-negative patients. The first (M1) contains a substitution from proline to serine at codon 15. A second group were infected with a previously described mutant (M2) containing a translational stop codon. HBeAg-positive patients were infected with the wild-type virus or the M1-containing strain. M2 emerged in patients with wild-type infection after seroconversion to anti-HBe, whereas M1 was present during the HBeAg-positive phase. In those with fluctuating HBe status, there was no correlation between prevailing HBe serology and sequence. There was an association between infection with variants and severe chronic hepatitis. Patients infected with strains containing M1 while HBeAg positive had a worse prognosis after seroconversion to anti-HBe.