Categorization is a function of the brain that serves to group together items and events in our environments. Here we review the following important issues related to category representation and generalization: namely, where categories are presented in the brain, and how the brain utilizes categorical membership to generate new information. Accumulated experimental evidence shows that the prefrontal cortex (PFC) plays a critical role in category formation and generalization. We propose that prefrontal neurons abstract the commonality beyond individual stimuli, and categorize these based on their common meaning by ignoring their physical properties and learning to represent the boundaries between behaviorally significant categories. We also claim that a subgroup of prefrontal neurons simultaneously receives the category-related information and specific property information (e.g. reward) associated with an exemplar, to form a category-based representation of that property, and propagates it among stimuli of the same category, possibly reflecting a neural basis for category generalization in the PFC. These results suggest that the PFC is involved in representing abstract rules, and generating new information on the basis of previously acquired knowledge.