The Alzheimer's disease-associated beta-amyloid peptide is produced through cleavage of amyloid precursor protein by beta-secretase and gamma-secretase. gamma-Secretase is a complex containing presenilin (PS) as the catalytic component and three essential cofactors: Nicastrin, anterior pharynx defective (APH-1) and presenilin enhancer-2 (PEN-2). PS and signal peptide peptidase (SPP) define a novel family of aspartyl proteases that cleave substrates within the transmembrane domain presumptively using two membrane-embedded aspartic acid residues for catalysis. Apart from the two aspartate-containing active site motifs, the only other region that is conserved between PS and SPP is a PAL sequence at the C-terminus. Although it has been well documented that this motif is essential for gamma-secretase activity, the mechanism underlying such a critical role is not understood. Here we show that mutations in this motif affect the conformation of the active site of gamma-secretase resulting in a complete loss of PS binding to a gamma-secretase transition state analog inhibitor, Merck C. Analogous mutations in SPP significantly inhibit its enzymatic activity. Furthermore, these mutations also abolish SPP binding to Merck C, indicating that SPP and gamma-secretase share a similar active site conformation, which is dependent on the PAL motif. Exploring the amino acid requirements within this motif reveals a very small side chain requirement, which is conserved during evolution. Together, these observations strongly support the hypothesis that the PAL motif contributes to the active site conformation of gamma-secretase and of SPP.