Despite the phagocytic machinery available to microglia the aberrant amyloid proteins produced during Alzheimer's and prion disease, amyloid‐β and PrP^Sc, are inefficiently cleared. We have shown that microglia in the ME7 model of prion disease show morphological evidence of activation, synthesize low levels of pro‐inflammatory cytokines and are primed to produce exaggerated responses to subsequent inflammatory challenges. Whether these microglia engage in significant phagocytic activity in the disease per se, or upon subsequent inflammatory challenge is not clear. In the present study we show transcriptional activation of a large number of scavenger receptors (SRs), matrix metalloproteinases (MMPs), oxidative enzymes, and cathepsins in ME7 animals. Hippocampally‐injected inert latex beads (6 μm) are efficiently phagocytosed by microglia of ME7 prion‐diseased animals, but not by microglia in normal animals. Stimulation of ME7 animals with systemic bacterial endotoxin (lipopolysaccharide, LPS) induced further increases in SR‐A2, MMP3, and urokinase plasminogen activator receptor (uPAR) but decreased, or did not alter, transcription of most phagocytosis‐related genes examined and did not enhance clearance of deposited PrP^Sc. Furthermore, intracerebral injection with LPS (0.5 μg) induced marked microglial production of IL‐1β, robust cellular infiltration and marked apoptosis but also did not induce further clearance of PrP^Sc. These data indicate that microglia in the prion‐diseased brain are capable of phagocytosis per se, but show limited efficacy in removing PrP^Sc even upon marked escalation of CNS inflammation. Furthermore, microglia/macrophages remain IL‐1β‐negative during phagocytosis of apoptotic cells. The data demonstrate that phagocytic activity and pro‐inflammatory microglial phenotype do not necessarily correlate. © 2010 Wiley‐Liss, Inc.