Nonalcoholic steatohepatitis (NASH) involves liver lipid accumulation (steatosis) combined with hepatic inflammation. The transition towards hepatic inflammation represents a key step in pathogenesis, because it will set the stage for further liver damage, culminating in hepatic fibrosis, cirrhosis, and liver cancer. The actual risk factors that drive hepatic inflammation during the progression to NASH remain largely unknown. The role of steatosis and dietary cholesterol in the etiology of diet‐induced NASH was investigated using hyperlipidemic mouse models fed a Western diet. Livers of male and female hyperlipidemic (low‐density lipoprotein receptor–deficient [ldlr^−/−] and apolipoprotein E2 knock‐in [APOE2ki]) mouse models were compared with livers of normolipidemic wild‐type (WT) C57BL/6J mice after short‐term feeding with a high‐fat diet with cholesterol (HFC) and without cholesterol. Whereas WT mice displayed only steatosis after a short‐term HFC diet, female ldlr^−/− and APOE2ki mice showed steatosis with severe inflammation characterized by infiltration of macrophages and increased nuclear factor κB (NF‐κB) signaling. Remarkably, male ldlr^−/− and APOE2ki mice developed severe hepatic inflammation in the absence of steatosis after 7 days on an HFC diet compared with WT animals. An HFC diet induced bloated, “foamy” Kupffer cells in male and female ldlr^−/− and APOE2ki mice. Hepatic inflammation was found to be linked to increased plasma very low‐density lipoprotein (VLDL) cholesterol levels. Omitting cholesterol from the HFC diet lowered plasma VLDL cholesterol and prevented the development of inflammation and hepatic foam cells. Conclusion: These findings indicate that dietary cholesterol, possibly in the form of modified plasma lipoproteins, is an important risk factor for the progression to hepatic inflammation in diet‐induced NASH. (HEPATOLOGY 2008;48:474–486.)