The construction of two fused genes is described. One involves the in-frame fusion of the yeast prepro-alpha-factor coding sequence, and the Escherichia coli lac Z gene. The second gene fusion utilizes a 103 bp yeast invertase NH2-terminal coding sequence at the fusion junction of the hybrid gene described above. The gene fusions, under the control of the alpha-factor promoter, expressed active beta-galactosidase in alpha haploid yeast cells. The activity could be regulated in a temperature-sensitive sir3 mutant. The incorporation of the invertase coding sequence at the MF alpha 1-lacZ fusion junction provided significantly higher levels of beta-galactosidase activity. A substantial quantity of the hybrid proteins generated from the gene fusions was primarily localized in the intracellular membranes of yeast cells, while a processed form could be secreted into the periplasm.