Maternal inflammation plays a role in the etiology of certain neurodevelopmental disorders including autism and schizophrenia. Because maternal inflammation can lead to activation of fetal microglia, we have examined effects of inflamed microglia on cultured neural progenitors from rat embryonic septal region and basal forebrain. These cells give rise to cholinergic neurons projecting to cortex and hippocampus. Microglia stimulated with lipopolysaccharide (LPS), peptidoglycan, Poly I:C and CD154 produce conditioned media (CM) that promotes excessive numbers of cholinergic neurons and levels of choline acetyltransferase (ChAT) activity 6-8 times that of untreated cultures. Expression of the neural-specific transcription factor MATH1 increases substantially within 1 h of plating in LPS-CM. Untreated cultures do not attain equivalent levels until 6 h. By contrast, expression of glial-related transcription factors in LPS-CM-treated cultures never attains the elevated levels of untreated cultures. LPS-CM-treated clones derived from individual progenitors labeled with a LacZ-expressing retrovirus showed >2.5-fold increase in the percentage of cholinergic cells compared with untreated clones. Thus, CM from activated microglia prompts excess cholinergic differentiation from undifferentiated progenitors suggesting that microglial inflammation during critical stages can lead to aberrant brain development.