Telomere shortening and inactivation of cell cycle checkpoints characterize carcinogenesis. Whether these molecular features coincide at specific stages of human hepatocarcinogenesis is unknown. The preneoplasia–carcinoma sequence of human HCC is not well defined. Small cell changes (SCC) and large cell changes (LCC) are potential precursor lesions. We analyzed hepatocellular telomere length, the prevalence of DNA damage, and the expression of p21 and p16 in biopsy specimens of patients with chronic liver disease (n = 27) that showed different precursor lesions and/or HCC: liver cirrhosis (n = 25), LCC (n = 26), SCC (n = 13), and HCC (n = 13). The study shows a decrease in telomere length in nondysplastic cirrhotic liver compared with normal liver and a further significant shortening of telomeres in LCC, SCC, and HCC. HCC had the shortest telomeres, followed by SCC and LCC. Hepatocytes showed an increased p21 labeling index (p21‐LI) at the cirrhosis stage, which remained elevated in most LCC. In contrast, most SCC and HCC showed a strongly reduced p21‐LI. Similarly, p16 was strongly expressed in LCC but reduced in SCC and not detectable in HCC. γH2AX‐DNA‐damage‐foci were not detected in LCC but were present in SCC and more frequently in HCC. These data indicate that LCC and SCC represent clonal expansions of hepatocytes with shortened telomeres. Conclusion: The inactivation of cell cycle checkpoints coincides with further telomere shortening and an accumulation of DNA damage in SCC and HCC, suggesting that SCC represent more advanced precursor lesions compared with LCC. (HEPATOLOGY 2007;45:968–976.)