Lung macrophages are the key immune effector cells in the pathogenesis of Chronic Obstructive Pulmonary Disease (COPD). Several studies have shown an increase in their numbers in bronchoalveolar lavage fluid (BAL) of subjects with COPD compared to controls, suggesting a pathogenic role in disease initiation and progression. Although reduced lung macrophage phagocytic ability has been previously shown in COPD, the relationship between lung macrophages’ phenotypic characteristics and functional properties in COPD is still unclear. (1) Methods: Macrophages harvested from bronchoalveolar lavage (BAL) fluid of subjects with and without COPD (GOLD grades, I–III) were immuno-phenotyped, and their function and gene expression profiles were assessed using targeted assays. (2) Results: BAL macrophages from 18 COPD and 10 (non-COPD) control subjects were evaluated. The majority of macrophages from COPD subjects were non-polarized (negative for both M1 and M2 markers; 77.9%) in contrast to controls (23.9%; p < 0.001). The percentages of these non-polarized macrophages strongly correlated with the severity of COPD (p = 0.006) and current smoking status (p = 0.008). Non-polarized macrophages demonstrated poor phagocytic function in both the control (p = 0.02) and COPD (p < 0.001) subjects. Non-polarized macrophages demonstrated impaired ability to phagocytose Staphylococcus aureus (p < 0.001). They also demonstrated reduced gene expression for CD163, CD40, CCL13 and C1QA&B, which are involved in pathogen recognition and processing and showed an increased gene expression for CXCR4, RAF1, amphiregulin and MAP3K5, which are all involved in promoting the inflammatory response. (3) Conclusions: COPD is associated with an abundance of non-polarized airway macrophages that is related to the severity of COPD. These non-polarized macrophages are predominantly responsible for the poor phagocytic capacity of lung macrophages in COPD, having reduced capacity for pathogen recognition and processing. This could be a key risk factor for COPD exacerbation and could contribute to disease progression.