Hepatitis B virus (HBV) replicates by reverse transcription of an RNA intermediate, the pregenomic RNA. The first step of HBV genome replication is the encapsidation of the pregenomic RNA encoding the encapsidation signal, termed epsilon, into the core particles, which is preceded by recognition and binding of HBV DNA polymerase to epsilon. The pregenomic RNA contains two identical epsilon elements due to its terminal redundancy: one near the 5' end and another near the 3' end. Despite the fact that both epsilon elements have an identical sequence, only the 5' epsilon, but not the 3' epsilon, is functional for encapsidation. To understand the molecular nature of this position effect, we made a series of lacZ RNA expression plasmids which contain the epsilon element at various positions from the 5' end of the transcripts. Following transfection, the lacZ RNAs in cytoplasmic core particles were measured by RNase protection assay for encapsidation. The results indicated that the lacZ RNAs with epsilon positioned up to 65 nucleotides from the 5' end were encapsidated, whereas the lacZ RNAs with epsilon positioned further downstream were not. Interestingly, the cap-free lacZ RNA transcribed by T7 RNA polymerase was not encapsidated, implying that the 5' cap structure is required for encapsidation of the pregenomic RNA. We hypothesized that HBV DNA polymerase must somehow recognize the cap structure and/or its associated factors, as well as the 5' epsilon, for encapsidation to occur.