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Microglia, the resident immune cells in the brain, play essential roles in synaptic pruning, neurodevelopment, and the pathogenesis of neuropsychiatric disorders. Since neuronal cells and microglia arise from different embryonic lineages, brain organoids differentiated from human induced pluripotent stem cells (iPSCs) do not typically contain microglial cells, limiting their utility in interrogating neuroimmune interactions in neurodevelopmental and in disease. Reliable methods to generate brain organoids with integrated microglial cells can model important in vivo cellular interactions in an in vitro system. We developed a method to generate microglia-containing cerebral organoids (MG-COs) from human iPSCs using concurrent induction of neuronal and microglial lineages by leveraging the respective patterning molecules for those two lineages during the early stages of embryoid body formation. The resulting MG-COs were characterized with systematic morphological and transcriptomic analyses at specific stages of the differentiation process to confirm lineage-specific differentiation. The transcriptome profiles of MG-COs were compared to cerebral organoids (COs) differentiated without microglial cells to delineate gene expression differences that arise in the setting of concurrent microglia differentiation during development and growth of the organoids. Neuronal network activity in the MG-COs and COs was assessed using microelectrode array (MEA) experiments. MG-COs generated with the protocol resulted in organoids that had a robust population of stable microglial cells integrated in the organoids, as evidenced by the presence of canonical microglial markers alongside neuronal and glial markers in the MG-COs. Transcriptomic profiling of MG-COs identified the presence of immune- and synapse-related genes, including those involved in microglial activation, synaptic plasticity, and neurotransmission in the MG-COs, underscoring the potential of MG-COs as a platform for modeling neuroimmune during neurodevelopment. MG-COs showed a robust response to the inflammatory cytokine IL-17a, which is known to activate microglia. MG-COs demonstrated significantly enhanced neuronal activity earlier in development, when compared to COs, with increased spontaneous firing activity and synchronized bursting in the MG-COs. We developed a robust protocol for generating MG-COs from human iPSCs through concurrent induction of microglial and neuronal cells during embryoid body formation, enabling the growth of cerebral organoids with integrated microglial cells. MG-COs generated using the protocol give rise to three-dimensional structures comprising neuronal, glial, and microglial cells, as evidenced by immunocytochemistry and gene expression. MG-COs exhibited similar composition of neuronal and glial cells, when compared to COs, except for the absence of microglial cells in COs, and the MG-COs showed robust response to inflammatory cytokines. This model provides a physiologically relevant platform for dissecting mechanisms mediating neuroimmune interactions in neurodevelopmental and in disease contexts.