In mammals, excess energy is stored in the form of triacylglycerol primarily in lipid droplets of white adipose tissue. The first step of lipolysis (i.e. the mobilization of fat stores) is catalyzed by adipose triglyceride lipase (ATGL). The enzymatic activity of ATGL is strongly enhanced by CGI-58 (comparative gene identification-58), and the loss of either ATGL or CGI-58 function causes systemic triglyceride accumulation in humans and mice. However, the mechanism by which CGI-58 stimulates ATGL activity is unknown. To gain insight into CGI-58 function using structural features of the protein, we generated a threedimensional homology model based on sequence similarity with other proteins. Interestingly, the model of CGI-58 revealed that the N terminus forms an extension of the otherwise compact structure of the protein. This N-terminal region (amino acids 1-30) harbors a lipophilic tryptophan-rich stretch, which affects the localization of the protein.1 H NMR experiments revealed strong interaction between the N-terminal peptide and dodecylphosphocholine micelles as a lipid droplet-mimicking system. A role for this N-terminal region of CGI-58 in lipid droplet binding was further strengthened by localization studies in cultured cells. Although wild-type CGI-58 localizes to the lipid droplet, the N-terminally truncated fragments of CGI-58 are dispersed in the cytoplasm. Moreover, CGI-58 lacking the N-terminal extension loses the ability to stimulate ATGL, implying that the ability of CGI-58 to activate ATGL is linked to correct localization. In summary, our study shows that the N-terminal, Trp-rich region of CGI-58 is essential for correct localization and ATGL-activating function of CGI-58.The protein CGI-58 (comparative gene identification-58; identical to ABHD5 (abhydrolase domain-containing protein 5)) plays an important role in mammalian fatty acid metabolism (1, 2). Interaction of CGI-58 with adipose triglyceride lipase (ATGL), 2 the enzyme catalyzing the first step of lipolysis, enhances the hydrolytic activity of ATGL up to 20-fold (1, 3). CGI-58 is predicted to harbor an ␣/-hydrolase domain. Typically, ␣/-hydrolases exert their catalytic activity via a catalytic triad. In the case of CGI-58, however, the putative active site serine is replaced by an asparagine residue. Consequently, no triglyceride (TG)-hydrolyzing activity could be detected for the protein.Very recently, lysophosphatidic acid acyltransferase (LPAAT) activity of CGI-58 was discovered and kinetically characterized (4, 5). In humans, mutations in CGI-58 are associated with the development of neutral lipid storage disease with ichthyosis, which is also known as Chanarin Dorfman syndrome. These patients accumulate neutral lipids in various tissues and cell types, including granulocytes, and suffer from non-bullous congenital ichthyosiform erythroderma (2, 6, 7). Mutant forms of CGI-58 detected in patients with neutral lipid storage disease with ichthyosis harboring nonsense or missense mutations (recently reviewed in Ref. 8) are not compet...