The Saccharomyces OLE1 gene encodes the Delta-9 fatty acid desaturase, an enzyme that converts saturated fatty acyl-CoAs into cis-Delta-9 unsaturated fatty acids. OLE1 gene expression is regulated by unsaturated fatty acids, which repress transcription and destabilize the OLE1 mRNA. Expression of OLE1 is activated by N-terminal proteolytic fragments of two homologous endoplasmic reticulum membrane proteins, Spt23p and Mga2p. Disruption of either gene does not significantly affect cell growth or fatty acid metabolism; cells that contain null alleles of both genes, however, are unsaturated fatty acid auxotrophs. An analysis of spt23Delta and mga2Delta strains shows that Spt23p and Mga2p differentially activate and regulate OLE1 transcription. In glucose-grown cells, both genes activate transcription to similar levels of activity. Expressed alone, Mga2p induces high levels of OLE1 transcription in cells exposed to cobalt or grown in glycerol-containing medium. Spt23p expressed alone activates OLE1 transcription to levels similar to those in wild type cells. OLE1 expression is strongly repressed by unsaturated fatty acids in spt23Delta or mga2Delta cells, under all growth conditions. To test if OLE1 expression is controlled by fatty acids at the level of membrane proteolysis, soluble N-terminal fragments of Spt23p and Mga2p that lack their membrane-spanning regions (Deltatm) were expressed under the control of their native promoters in spt23Delta;mga2Delta cells. Under those conditions, Mga2pDeltatm acts as a powerful transcription activator that is strongly repressed by unsaturated fatty acids. By comparison, the Spt23pDeltatm polypeptide weakly activates transcription and shows little regulation by unsaturated fatty acids. Co-expression of the two soluble fragments results in activation to levels observed with the Mga2pDeltatm protein alone. The fatty acid repression of transcription under those conditions is attenuated by Spt23Deltatm, however, suggesting that the two proteins may interact to modulate OLE1 gene expression.