The subject process enhances catalytic activity for demetallization and desulfurization of a residue feed stream by injecting water into the feed and hydrotreating in two stages with interstage separation. Water injection improves the demetallation activity of the HDM catalyst and separating vapor comprising hydrogen sulfide from the demetallized effluent improves the activity of the HDS catalyst. We have discovered that the water injection and hydrogen sulfide removal together provide a profound synergetic effect.