Cell density is the critical parameter controlling tendon morphogenesis. Knowing its neighbors allows a cell to regulate correctly its proliferation and collagen production. A missing link to understanding this process is a molecular description of the sensing mechanism. Previously, this mechanism was shown in cell culture to rely on a diffusible factor (SNZR [sensor]) with an affinity for the cell layer. This led to purifying conditioned medium over 4 columns and analyzing the final column fractions for band intensity on SDS gels versus biological activity - a 16 kD band strongly correlated between assays. N-terminal sequencing - EPLAVVDL - identified a large gene (424 AA), extremely conserved between chicken and human. In this paper we probe whether this is the correct gene. Can the predicted large protein be cleaved to a smaller protein? EPLAVVDL occurs towards the C-terminus and cleavage would create a small 94 AA protein. This protein would run at ∼10 kD, so what modifications or cofactor binding accounts for its running at 16 kD on SDS gels? This protein has no prominent hydrophobic regions, so can it be secreted? To validate its role, the chicken cDNA for this gene was tagged with myc and his and transfected into a human osteosarcoma cell line (U2OS). U2OS cells expressed the gene but not passively: differentiating into structures resembling spongy bone and expressing alkaline phosphatase, an early bone marker. Intracellularly, two bands were observed by Western blotting: the full length protein and a smaller form (26 kD). Outside the cell, a small band (28 kD) was detected, although it was 40% larger than expected, as well as multiple larger bands. These larger forms could be converted to the predicted smaller protein (94 AA + tags) by changing salt concentrations and ultrafiltering - releasing a cofactor to the filtrate while leaving a protein factor in the retentate. Using specific degradative enzymes and mass spectrometry, the bone cofactor was identified as a lipid containing a ceramide phosphate, a single chained glycerol lipid and a linker. Tendon uses a different cofactor made up of two fatty acid chains linked directly to the phosphate yielding a molecule about half the size. Moreover, adding the tendon factor/cofactor to osteosarcoma cells causes them to stop growing, which is opposite to its role with tendon cells. Thus, the cofactor is cell type specific both in composition and in the triggered response. Further support of its proposed role came from frozen sections from 5 week old mice where an antibody to the factor stained strongly at the growing ends of the tendon as predicted. In conclusion, the molecule needed for cell density signaling is a small protein bound to a unique, tissue-specific phospholipid yielding a membrane associated but diffusible molecule. Signal transduction is postulated to occur by an increased ordering of the plasma membrane as the concentration of this protein/lipid increases with cell density.