The natural history of lamivudine-resistant hepatitis B virus (HBV) infection in renal transplant recipients (RTx) is unclear, despite its increasing incidence. Twenty-nine HBsAg-positive RTx with rising HBV DNA received lamivudine therapy. The course of lamivudine-resistant HBV infection was studied prospectively. During 68.7 ± 12.5 months of follow-up, 14 (48.3%) patients developed lamivudine resistance, at 10–35 months (mean 16.9 ± 7.0). All showed mutant sequences at codons 552 and 528 of the YMDD motif, while 13 patients demonstrated wild-type sequence at codon 555. Lamivudine resistance was unrelated to patient demographics, HBeAg status/sero-conversion, or genotype. Following resistance, HBV DNA and alanine aminotransferase showed an initial increase followed by spontaneous gradual reduction. The subsequent peak HBV DNA was lower (1.26 ± 1.09 × 109 vs. 6.26 ± 12.23 × 109 copies/mL, p = 0.011), while that of alanine aminotransferase was higher (196 ± 117 vs. 77 ± 47 iμ/l, p = 0.005), compared with pretreatment levels. Post-resistance hepatitic flare occurred in 11 (78.6%) patients. This was transient in four (36.4%), but became chronic in six (54.5%) patients. Decompensation was noted in one patient during this flare, but all survived. We conclude that drug resistance is prevalent in lamivudine-treated RTx. Despite a lower ensuing peak viremia compared with baseline, hepatitic flare is common. While most patients have spontaneous resolution, a minority may develop potentially fatal decompensation during the preceding exacerbation.