The formation of myelin sheaths in the CNS is the result of a complex series of events involving oligodendrocyte progenitor cell (OPC) proliferation, directed migration, and the morphological changes associated with axon ensheathment and myelination. To examine the role of Rho GTPases in oligodendrocyte biology, we have used a conditional tissue-specific gene-targeting approach. Ablation of Cdc42 in cells of the oligodendrocyte lineage did not affect OPC proliferation, directed migration, or in vitro differentiation, but it led to the formation of a unique and stage-specific myelination phenotype. This was characterized by the extraordinary enlargement of the inner tongue of the oligodendrocyte process and concomitant formation of a myelin outfolding as a result of abnormal accumulation of cytoplasm in this region. Ablation of Rac1 also resulted in the abnormal accumulation of cytoplasm in the inner tongue of the oligodendrocyte process, and we provide genetic evidence that rac1 synergizes with cdc42 in a gene dosage-dependent way to regulate myelination.