The most visible and, until very recently, the only hypothesis regarding the involvement of microglial cells in Alzheimer's disease (AD) pathogenesis is centered around the notion that activated microglia are neurotoxin‐producing immune effector cells actively involved in causing the neurodegeneration that is the cause for AD dementia. The concept of detrimental neuroinflammation has gained a strong foothold in the AD arena and is being expanded to other neurodegenerative diseases. This review takes a comprehensive and critical look at the overall evidence supporting the neuroinflammation hypothesis and points out some weaknesses. The current work also reviews evidence for an alternative theory, the microglial dysfunction hypothesis, which, although eliminating some of the shortcomings, does not necessarily negate the amyloid/neuroinflammation theory. The microglial dysfunction theory offers a different perspective on the identity of activated microglia and their role in AD pathogenesis taking into account the most recent insights gained from studying basic microglial biology. © 2004 Wiley‐Liss, Inc.