Transcription of phospholipid biosynthetic genes in the yeast Saccharomyces cerevisiae is maximally derepressed when cells are grown in the absence of inositol and repressed when the cells are grown in its presence. We have previously suggested that this response to inositol may be dictated by regulating transcription of the cognate activator gene, INO2. However, it was also known that cells which harbor a mutant opi1 allele express constitutively derepressed levels of target genes (INO1 and CHO1), implicating the OPI1 negative regulatory gene in the response to inositol. These observations suggested that the response to inositol may involve both regulation of INO2 transcription as well as OPI1-mediated repression. We investigated these possibilities by examining the effect of inositol on target gene expression in a strain containing the INO2 gene under control of the GAL1 promoter. In this strain, transcription of the INO2 gene was regulated in response to galactose but was insensitive to inositol. The expression of the INO1 and CHO1 target genes was still responsive to inositol even though expression of the INO2 gene was unresponsive. However, the level of expression of the INO1 and CHO1 target genes correlated with the level of INO2 transcription. Furthermore, the effect of inositol on target gene expression was eliminated by deleting the OPI1 gene in the GAL1-INO2-containing strain. These data suggest that the OPI1 gene product is the primary target (sensor) of the inositol response and that derepression of INO2 transcription determines the degree of expression of the target genes.