The Hedgehog signaling pathway is involved in early embryonic patterning as well as in cancer; however, little is known about the subcellular localization of the Hedgehog receptor complex of Patched and Smoothened. Since Hh has been found in lipid rafts in Drosophila, we hypothesized that Patched and Smoothened might also be found in these cholesterol-rich microdomains. In this study, we demonstrate that both Smoothened and Patched are in caveolin-1-enriched/raft microdomains. Immunoprecipitation studies show that Patched specifically interacts with caveolin-1, whereas Smoothened does not. Fractionation studies show that Patched and caveolin-1 can be co-isolated from buoyant density fractions that represent caveolae/raft microdomains and that Patched and caveolin-1 co-localize by confocal microscopy. Glutathione S-transferase fusion protein experiments show that the interaction between Patched and caveolin-1 involves the caveolin-1 scaffolding domain and a Patched consensus binding site. Immunocytochemistry data and fractionation studies also show that Patched seems to be required for transport of Smoothened to the membrane. Depletion of plasmalemmal cholesterol influences the distribution of the Hh receptor complex in the caveolin-enriched/raft microdomains. These data suggest that caveolin-1 may be integral for sequestering the Hh receptor complex in these caveolin-enriched microdomains, which act as a scaffold for the interactions with the Hh protein.