Microglial cells are central nervous system (CNS) resident cells that are thought to become activated and contribute to the inflammation that occurs in the human autoimmune disease multiple sclerosis (MS). This has never been proven, however, because microglial cells cannot be phenotypically distinguished from peripheral macrophages that accumulate in MS inflammatory lesions. To study the kinetics and nature of microglial cell activation in the CNS, we used the animal model of MS, experimental autoimmune encephalomyelitis (EAE), and induced EAE in bone marrow (BM) chimera mice generated using major histocompatibility complex (MHC)-mismatched donor BM, allowing the separation of microglial cells and peripheral monocytes/macrophages. We found that microglial cell activation was evident before onset of disease symptoms and infiltration of peripheral myeloid cells into the CNS. Activated microglial cells underwent proliferation and upregulated the expression of CD45, MHC class II, CD40, CD86, and the dendritic cell marker CD11c. At the peak of EAE disease, activated microglial cells comprised 37% of the total macrophage and dendritic cell populations and colocalized with infiltrating leukocytes in inflammatory lesions. Our findings thus definitively demonstrate that during EAE, microglial cells become activated early in EAE disease and then differentiate into both macrophages and dendritic-like cells, suggesting they play an active role in the pathogenesis of EAE and MS.