A range of physiological processes has been imputed to lateral domain formation in biological membranes. However the molecular mechanisms of these functions and the details of how domain structures mediate these processes remain largely speculative. That domains exist in biomembranes and can be modeled in relatively simple lipid systems has contributed to our understanding of the principles governing phase behaviour in membranes. A presentation of these principles is the subject of this review. The condensing effect of sterols on phospholipids spread as monomolecular films at the air-water interface is described in terms of the dependence of the effect on sterol and phospholipid structure. The thermodynamics of sphingomyelin-cholesterol interactions are considered from calorimetric, densitometry and equilibrium cholesterol exchange measurements. Biophysical characterisation of the structure of liquid-ordered phase and its relationship with liquid-disordered phase is described from spectroscopic and X-ray scattering studies. Finally, the properties of liquid-ordered phase in the context of membrane physiology and permeability barrier properties are considered.