The hypothesis that Mallory body formation by hepatocytes is a sign of preneoplasia was tested. This hypothesis was based on animal experiments but has not been tested in man. The authors studied the livers of 181 human autopsies in which hepatocellular carcinoma (HCC) was present and 82 cirrhotic livers from patients with alcoholism, HB viral infection, or cryptogenic cirrhosis. The frequency of Mallory bodies in nonneoplastic hepatocytes was 40% in the HCC-bearing livers with cirrhosis (LC). In HCC-bearing livers with pre-cirrhotic changes (PC), 25% showed Mallory body formation by nonneoplastic hepatocytes. In the cases of HCC, where there was no accompanying PC or LC, Mallory bodies were never found in the nonneoplastic hepatocytes. When the 82 cirrhotic livers without HCC and the 116 cirrhotic cases with HCC were combined, it was found that HCC was present in 70% of cirrhotic livers when the nonneoplastic liver cells contained Mallory bodies. When no Mallory bodies were found in the nonneoplastic liver cells, HCC was present in 53% of cases. The difference between the two groups was significant (P less than 0.05). The difference was significant for both HB viral hepatitis and cryptogenic cirrhosis but not for alcoholic cirrhosis. Likewise, when nonneoplastic hepatocytes formed Mallory bodies in cirrhotic livers, there was a statistically significant increase in the number of HCC cells that formed Mallory bodies (P less than 0.01). When nonneoplastic hepatocytes occurred in groups of Mallory body forming cells, the hepatocellular features were atypical and characteristic of dysplastic cells. The evidence indicates that when Mallory body formation was observed in HBsAg-positive and cryptogenic cirrhotic livers, they were associated with an increased frequency of HCC formation in man.