Inclusion Criteria:

Patients must fulfill all of the following criteria to be eligible for enrollment into the study:

1. Men or women age 18 to 75 years
2. Chronic hepatitis B infection based on a history of positive anti-HBsAg and positive for HBV DNA and with or without elevations in liver tests (test to be repeated on screening)

Exclusion Criteria:

Patients with any of the following will be excluded from randomization:

1. Presence of clinically evident cirrhosis including: ascites requiring active diuretic therapy, history of or therapy for hepatic encephalopathy, or history of GI variceal bleeding
2. Platelet count < 50,000/mm3
3. Serum ALT level > 10 times upper limit of normal
4. Alpha-fetoprotein level ≥ 200 ng/mL or alpha-fetoprotein level between 50-200 ng/mL in association with liver ultrasound or other radiographic abnormality suspicious for hepatic neoplasm
5. Serum creatinine level > 1.6 mg/dL
6. Hematology outside of specified limits: neutrophil count <1000/mm3, hemoglobin <10 g/dL in males and <9 g/dL in females
7. Unstable or uncontrolled thyroid disease
8. Treatment with any interferon-α or nucleoside/tide analog within the previous 4 weeks
9. Presence of clinically significant cryoglobulinemia (e.g., skin rash, arthritis, or renal insufficiency due to cryoglobuliemia)
10. Presence or history of autoimmune hepatitis, alpha-1 anti-trypsin deficiency, hemochromatosis, Wilson's disease, drug- or toxin-induced liver disease, alcohol-related liver disease, primary biliary cirrhosis, or sclerosing cholangitis (mild-to-moderate steatosis is acceptable)
11. Chronic hepatitis C infection
12. Hepatits Delta infection (HDV)
13. Known history of HIV infection or positive HIV antibody test by Western Blot (test performed within 60 days of screening can be used to determine eligibility)
14. A disease known to cause significant alteration in immunologic function including hematological malignancy or autoimmune disorder (e.g. rheumatoid arthritis, systemic lupus erythematosis, autoimmune thyroid disease, leukemia, lymphoma, etc)
15. Concurrent therapy with immunosuppressive drugs or cytotoxic agents such as oral prednisone, cyclosporine, azathioprine, or chemotherapeutic agent(s) (e.g., cyclophosphamide, methotrexate, or cancer chemotherapy) or radiation therapy

16. Behavior that suggests a significant risk of poor compliance including, but not limited to:

    1. Illicit drug abuse within the past 3 years
    2. Current or history of alcohol abuse within the past 2 years
17. Prior treatment with IFN-γ 1b

18. History of unstable or deteriorating cardiac disease, including but not limited to:

    1. Myocardial infarction, coronary artery bypass surgery, or angioplasty within the past 6 months
    2. Congestive heart failure requiring hospitalization within the past 6 months
    3. Uncontrolled arrhythmias
    4. Transient ischemic attacks (TIAs)
    5. Any cardiac condition that, in the opinion of the site PI, might be significantly exacerbated by flu-like symptoms associated with the administration of IFN γ 1b
19. Preexisting (within last two years) or active psychiatric condition including severe depression, major psychoses, suicidal ideation or suicidal attempts

20. History of (within last two years) or current neurologic or psychiatric disorder that, in the opinion of the site PI, might be exacerbated by flu-like symptoms associated with the administration of IFN γ 1b. In addition, patients with the following conditions should be excluded:

    1. History of multiple sclerosis
    2. Seizures within the past 2 years
21. Severe or poorly controlled diabetes
22. Pregnancy or lactation. Females of childbearing potential are required to have a negative urine pregnancy test prior to treatment and must agree to practice abstinence or prevent pregnancy by at least a barrier method of birth control for the duration of the study
23. Hemoglobinopthies (e.g. thalassemia, sickle cell disease)
24. Any serious or chronic disease that, in the opinion of the Principal Investigator (PI), may affect the assessment of safety or efficacy parameters. This includes, but is not limited to, patients with malignancy who are receiving chemotherapy, chronic obstructive pulmonary disease or asthma requiring maintenance oral steroids, or active kidney disease
25. Any condition which, in the opinion of the site PI, is likely to result in the death of the patient within the next year
26. Patients who, in the opinion of the site PI, are not suitable candidates for enrollment or would not comply with the requirements of the study
27. Patients who have had a liver transplant
28. Patients who have Adefovir mutations on baseline tests