In the yeast Saccharomyces cerevisiae, two acyl-CoA:sterol acyltransferases (ASATs) that catalyze the synthesis of steryl esters have been identified, namely Are2p (Sat1p) and Are1p (Sat2p). Deletion of either ARE1 or ARE2 has no effect on cell viability, and are1are2 double mutants grow in a similar manner to wild-type despite the complete lack of cellular ASAT activity and steryl ester formation [Yang, H., Bard, M., Bruner, D. A., Gleeson, A., Deckelbaum, R. J., Aljinovic, G., Pohl, T. M., Rothstein, R. & Sturley, S. L. (1996) Science 272, 1353-1356; Yu, C., Kennedy, J., Chang, C. C. Y. & Rothblatt, J. A. (1996) J. Biol. Chem. 271, 24157-24163]. Here we show that both Are2p and Are1p reside in the endoplasmic reticulum as demonstrated by measuring ASAT activity in subcellular fractions of are1 and are2 deletion strains. This localization was confirmed by fluorescence microscopy using hybrid proteins of Are2p and Are1p fused to green fluorescent protein (GFP). Lipid analysis of are1 and are2 deletion strains revealed that Are2p and Are1p utilize sterol substrates in vivo with different efficiency; Are2p has a significant preference for ergosterol as a substrate, whereas Are1p esterifies sterol precursors, mainly lanosterol, as well as ergosterol. The specificity towards fatty acids is similar for both isoenzymes. The lack of steryl esters in are1are2 mutant cells is largely compensated by an increased level of free sterols. Nevertheless, terbinafine, an inhibitor of ergosterol biosynthesis, inhibits growth of are1are2 cells more efficiently than growth of wild-type. In a growth competition experiment are1are2 cells grow more slowly than wild-type after several rounds of cultivation, suggesting that Are1p and Are2p or steryl esters, the product formed by these two enzymes, are more important in the natural environment than under laboratory conditions.