In Saccharomyces cerevisiae, expression of acid phosphatase, encoded by the PHO5 gene, requires two positive regulatory factors, Pho4 and Pho2 (also called Bas2 or Grf10). Using GAL4-PHO4 fusions, we demonstrate that a functional interaction between these two proteins is necessary for transcriptional activation to occur. This functional interaction between Pho4 and Pho2 is independent of the presence of the negative regulatory factor, Pho80, which also interacts with Pho4. Interestingly, truncations of Pho4 missing amino acids 252-265, which encompass the basic region of the basic helix-loop-helix (bHLH) DNA binding motif, exhibit high transcriptional activation that is independent of the Pho2 molecule. Single amino acid mutations of highly conserved residues within this area all display this Pho2-independent phenotype. A region near the C-terminus of Pho2 appears to be critical for this interaction with Pho4. A model to account for the requirement for Pho2 in Pho4-dependent transcriptional activation is proposed.