Dendritic cells (DCs) are derived from CD34⁺ progenitors and play a central role in the development of immune responses and in tolerance. Their therapeutic potential underscores the need for in vivo models that accurately recapitulate human DC development and function to provide a better understanding of DC biology in health and disease. Using nonobese diabetic/severe combined immunodeficiency (NOD/SCID) mice transplanted with human CD34⁺ cells as a model of human hematopoiesis, we examined DC ontogeny. Progenitors of both myeloid (m) and plasmacytoid (p) DCs were identified in the bone marrow of mice up to 24 weeks after transplant, indicating ongoing and sustained production of DCs after initial engraftment. To determine whether human DCs derived from transplanted stem cells were functional, their response to acute inflammation using lipopolysaccharide (LPS) was examined. Eighteen hours after LPS administration, a dramatic increase in the plasma levels of the human inflammatory cytokines interleukin (IL)‐8, IL‐10, tumor necrosis factor‐α, and IL‐12p70 was observed. Only mDCs and not pDCs responded in vivo to LPS by upregulating CD86 and CD83. In vivo activation of human mDCs resulted in a substantial increase in the ability of mDCs to induce the proliferation of naive human T cells. Taken together, these data indicate that human CD34⁺ cells seem to have differentiated appropriately within the NOD/SCID microenvironment into DCs that are developmentally, phenotypically, and functionally similar to the DC subsets found in humans.