Intramembrane proteolysis is a new paradigm in biology that controls signaling events throughout evolution. Hydrolysis of peptide bonds is thought to occur within the normally hydrophobic membrane environment, but insights into this unusual activity have been lacking because of difficulty in recapitulating activity in vitro. We have reconstituted intramembrane proteolysis with a pure recombinant substrate and rhomboid proteins in both detergent micelles and artificial membrane environments. Rhomboid proteins from diverse organisms including two model bacteria, a pathogen, an extremophile, and an animal were robustly active in pure form, proving that rhomboids are a new class of enzymes and do not require cofactors to catalyze intramembrane proteolysis. Rhomboid proteins directly recognized their substrates in vitro by the top of the substrate transmembrane domain, displaying specificity apparently reciprocal to that of gamma-secretase, the only other activity known to cleave type-I transmembrane domains. Rhomboid proteases represent a different evolutionary path to a serine protease mechanism and exhibited an inhibitor profile unlike other serine proteases. Intriguingly, activity was dramatically modulated by different membrane phospholipid environments, suggesting a mechanism for regulating these proteases. This analysis promises to help reveal the biochemical mechanisms and biological roles of this most widely conserved membrane protein family.