Yeast Phs1 is the 3-hydroxyacyl-CoA dehydratase that catalyzes the third reaction of the four-step cycle in the elongation of very long-chain fatty acids (VLCFAs). In yeast, the hydrophobic backbone of sphingolipids, ceramide, consists of a long-chain base and an amide-linked C26 VLCFA. Therefore, defects in VLCFA synthesis would be expected to greatly affect sphingolipid synthesis. In fact, in this study we found that reduced Phs1 levels result in significant impairment of the conversion of ceramide to inositol phosphorylceramide. Phs1 proteins are conserved among eukaryotes, constituting a novel protein family. Phs1 family members exhibit no sequence similarity to other dehydratase families, so their active site sequence and catalytic mechanism have been completely unknown. Here, by mutating 22 residues conserved among Phs1 family members, we identified six amino acid residues important in Phs1 function, two of which (Tyr-149 and Glu-156) are indispensable. We also examined the membrane topology of Phs1 using an N-glycosylation reporter assay. Our results suggest that Phs1 is a membrane-spanning protein that traverses the membrane six times and has an N terminus and C terminus facing the cytosol. The important amino acids are concentrated in or near two of the six proposed transmembrane regions. Thus, we also propose a catalytic mechanism for Phs1 that is not unlike mechanisms used by other hydratases active in lipid synthesis.