Dipeptidyl peptidase IV (DPP-IV/CD26) is a multifunctional type II transmembrane serine peptidase. This enzyme contributes to the regulation of various physiological processes, including blood sugar homeostasis, by cleaving peptide hormones, chemokines and neuropeptides. We have determined the 2.5 A structure of the extracellular region of DPP-IV in complex with the inhibitor valine-pyrrolidide. The catalytic site is located in a large cavity formed between the alpha/beta-hydrolase domain and an eight-bladed beta-propeller domain. Both domains participate in inhibitor binding. The structure indicates how substrate specificity is achieved and reveals a new and unexpected opening to the active site.