Background: Demyelination and axonal damage are critical processes in the pathogenesis of multiple sclerosis (MS). Oxidative stress and pro-inflammatory cytokines elicited by inflammation mediates tissue damage. Methods/Principal Findings: To monitor the demyelination and axonal injury associated with microglia activation we employed a model using cerebellar organotypic cultures stimulated with lipopolysaccharide (LPS). Microglia activated by LPS released pro-inflammatory cytokines (IL-1β, IL-6 and TNFα), and increased the expression of inducible nitric oxide synthase (iNOS) and production of reactive oxygen species (ROS). This activation was associated with demyelination and axonal damage in cerebellar cultures. Axonal damage, as revealed by the presence of non-phosphorylated neurofilaments, mitochondrial accumulation in axonal spheroids, and axonal transection, was associated with stronger iNOS expression and concomitant increases in ROS. Moreover, we analyzed the contribution of pro-inflammatory cytokines and oxidative stress in demyelination and axonal degeneration using the iNOS inhibitor ethyl pyruvate, a free-scavenger and xanthine oxidase inhibitor allopurinol, as well as via blockage of pro-inflammatory cytokines using a Fc-TNFR1 construct. We found that blocking microglia activation with ethyl pyruvate or allopurinol significantly decreased axonal damage, and to a lesser extent, demyelination. Blocking TNFα significantly decreased demyelination but did not prevented axonal damage. Moreover, the most common therapy for MS, interferon-beta, was used as an example of an immunomodulator compound that can be tested in this model. In vitro, interferon-beta treatment decreased oxidative stress (iNOS and ROS levels) and the release of pro-inflammatory cytokines after LPS stimulation, reducing axonal damage. Conclusion: The model of neuroinflammation using cerebellar culture stimulated with endotoxin mimicked myelin and axonal damage mediated by the combination of oxidative stress and pro-inflammatory cytokines. This model may both facilitate understanding of the events involved in neuroinflammation and aid in the development of neuroprotective therapies for the treatment of MS and other neurodegenerative diseases. © 2013 di Penta et al.