Site-specific proteases play critical roles in regulating many cellular processes. To identify novel site-specific proteases, their regulators, and substrates, we have designed a general reporter system in Saccharomyces cerevisiae in which a transcription factor is linked to the intracellular domain of a transmembrane protein by protease cleavage sites. Here, we explore the efficacy of this approach by using caspases, a family of aspartate-specific cysteine proteases, as a model. Introduction of an active caspase into cells that express a caspase-cleavable reporter results in the release of the transcription factor from the membrane and subsequent activation of a nuclear reporter. We show that known caspases activate the reporter, that an activator of caspase activity stimulates reporter activation in the presence of an otherwise inactive caspase, and that caspase inhibitors suppress caspase-dependent reporter activity. We also find that, although low or moderate levels of active caspase expression do not compromise yeast cell growth, higher level expression leads to lethality. We have exploited this observation to isolate clones from a Drosophila embryo cDNA library that block DCP-1 caspase-dependent yeast cell death. Among these clones, we identified the known cell death inhibitor DIAP1. We showed, by using bacterially synthesized proteins, that glutathione S-transferase-DIAP1 directly inhibits DCP-1 caspase activity but that it had minimal effect on the activity of a predomainless version of a second Drosophila caspase, drICE.