Desmoglein-2 (Dsg2) is a desmosomal cadherin that is aberrantly expressed in human skin carcinomas. In addition to its well-known role in mediating intercellular desmosomal adhesion, Dsg2 regulates mitogenic signaling that may promote cancer development and progression. However, the mechanisms by which Dsg2 activates these signaling pathways and the relative contribution of its signaling and adhesion functions in tumor progression are poorly understood. In this study we show that Dsg2 associates with caveolin-1 (Cav-1), the major protein of specialized membrane microdomains called caveolae, which functions in both membrane protein turnover and intracellular signaling. Sequence analysis revealed that Dsg2 contains a putative Cav-1-binding motif. A permeable competing peptide resembling the Cav-1 scaffolding domain bound to Dsg2, disrupted normal Dsg2 staining and interfered with the integrity of epithelial sheets in vitro. Additionally, we observed that Dsg2 is proteolytically processed; resulting in a 95-kDa ectodomain shed product and a 65-kDa membrane-spanning fragment, the latter of which localizes to lipid rafts along with full-length Dsg2. Disruption of lipid rafts shifted Dsg2 to the non-raft fractions, leading to the accumulation of these proteins. Interestingly, Dsg2 proteolytic products are elevated in vivo in skin tumors from transgenic mice overexpressing Dsg2. Collectively, these data are consistent with the possibility that accumulation of truncated Dsg2 protein interferes with desmosome assembly and/or maintenance to disrupt cell-cell adhesion. Furthermore, the association of Dsg2 with Cav-1 may provide a mechanism for regulating mitogenic signaling and modulating the cell-surface presentation of an important adhesion molecule, both of which could contribute to malignant transformation and tumor progression.