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 three-dimensional 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.