After the cellular prion protein (PrP c) transits to the cell surface where it is bound by a glycophosphatidyl inositol (GPI) anchor, PrP c is either metabolized or converted into the scrapie isoform (Prpsc). Because most GPI-anchored proteins are associated with cholesterol-rich membranous microdomains, we asked whether such structures participate in the metabolism of PrP c or the formation of PrP sc. The initial degradation of PrP c involves removal of the NH2 terminus of PrP c to produce a 17-kD polypeptide which was found in a Triton X-100 insoluble fraction. Both the formation of PrP s~ and the initial degradation of PrP c were diminished by lovastatin-mediated depletion of cellular cholesterol but were insensitive to NI-LCI. Further degradation of the 17-kD polypeptide did occur within an NI-LCl-sensitive, acidic compartment. Replacing the GPI addition signal with the transmembrane and cytoplasmic domains of mouse CD4 rendered chimeric CD4PrP c soluble in cold Triton X-100. Both CD4PrP c and truncated PrP c without the GPI addition signal (Rogers, M., E Yehieley, M. Scott, and SB Prusiner. 1993. Proc. Natl. Acad. Sci. USA. 90: 3182-3186) were poor substrates for PrP s¢ formation. Thus, it seems likely that both the initial degradation of PrP c to the 17-kD polypeptide and the formation of PrP s¢ occur within a non-acidic compartment bound by cholesterol-rich membranes, possibly glycolipid-rich microdomains, where the metabolic fate of PrP c is determined. The pathway remains to be identified by which the 17-kD polypeptide and PrP s¢ are transported to an acidic compartment, presumably endosomes, where the 17-kD polypeptide is hydrolyzed and limited proteolysis of PrP s~ produces PrP 27-30.