BACKGROUND: Staphylococcus aureus is one of the major causes of community-acquired and hospital-acquired infections. It produces numerous toxins including superantigens that cause unique disease entities such as toxic-shock syndrome and staphylococcal scarlet fever, and has acquired resistance to practically all antibiotics. Whole genome analysis is a necessary step towards future development of countermeasures against this organism. METHODS: Whole genome sequences of two related S aureus strains (N315 and Mu50) were determined by shot-gun random sequencing. N315 is a meticillin-resistant S aureus (MRSA) strain isolated in 1982, and Mu50 is an MRSA strain with vancomycin resistance isolated in 1997. The open reading frames were identified by use of GAMBLER and GLIMMER programs, and annotation of each was done with a BLAST homology search, motif analysis, and protein localisation prediction. FINDINGS: The Staphylococcus genome was composed of a complex mixture of genes, many of which seem to have been acquired by lateral gene transfer. Most of the antibiotic resistance genes were carried either by plasmids or by mobile genetic elements including a unique resistance island. Three classes of new pathogenicity islands were identified in the genome: a toxic-shock-syndrome toxin island family, exotoxin islands, and enterotoxin islands. In the latter two pathogenicity islands, clusters of exotoxin and enterotoxin genes were found closely linked with other gene clusters encoding putative pathogenic factors. The analysis also identified 70 candidates for new virulence factors. INTERPRETATION: The remarkable ability of S aureus to acquire useful genes from various organisms was revealed through the observation of genome complexity and evidence of lateral gene transfer. Repeated duplication of genes encoding superantigens explains why S aureus is capable of infecting humans of diverse genetic backgrounds, eliciting severe immune reactions. Investigation of many newly identified gene products, including the 70 putative virulence factors, will greatly improve our understanding of the biology of staphylococci and the processes of infectious diseases caused by S aureus.