The conformational conversion of the cellular prion protein, PrP(C), to the misfolded isoform PrP(Sc )is the central pathogenic event in the uniquely transmissible neurodegenerative prion diseases. As both PrP(C) and PrP(Sc) are associated with membranes, the nature of the membrane microenvironment may well play a significant role in both the conformational conversion process as well as the normal functions of PrP(C). Within the membrane are various microdomains, areas of distinct lipid and protein composition, the best studied of which are the cholesterol- and sphingolipid-rich lipid rafts. These domains are characterized biochemically by their relative resistance to solubilization in certain detergents at low temperature. In this article we review the evidence for the involvement of lipid rafts in the localization and trafficking of PrP(C), in the cellular signaling, neuroprotective and metal binding functions of PrP(C), and as sites for the conversion of PrP(C) to PrP(Sc) and in cell-to-cell prion transmission.