Prion diseases are fatal, transmissible neurodegenerative disorders associated with conversion of the host‐encoded prion protein (PrP^C) into an abnormal pathogenic isoform (PrP^Sc). Following exposure to the infectious agent (PrP^Sc) in acquired disease, infection is propagated in lymphoid tissues prior to neuroinvasion and spread within the central nervous system. The mechanism of prion dissemination is perplexing due to the lack of plausible PrP^Sc‐containing mobile cells that could account for prion spread between infected and uninfected tissues. Evidence exists to demonstrate that the culture media of prion‐infected neuronal cells contain PrP^Sc and infectivity but the nature of the infectivity remains unknown. In this study we have identified PrP^C and PrP^Sc in association with endogenously expressing PrP neuronal cell‐derived exosomes. The exosomes from our prion‐infected neuronal cell line were efficient initiators of prion propagation in uninfected recipient cells and to non‐neuronal cells. Moreover, our neuronal cell line was susceptible to infection by non‐neuronal cell‐derived exosome PrP^Sc. Importantly, these exosomes produced prion disease when inoculated into mice. Exosome‐associated PrP is packaged via a novel processing pathway that involves the N‐terminal modification of PrP and selection of distinct PrP glycoforms for incorporation into these vesicles. These data extend our understanding of the relationship between PrP and exosomes by showing that exosomes can establish infection in both neighbouring and distant cell types and highlight the potential contribution of differentially processed forms of PrP in disease distribution. These data suggest that exosomes represent a potent pool of prion infectivity and provide a mechanism for studying prion spread and PrP processing in cells endogenously expressing PrP. Copyright © 2007 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.