The death-inducing signaling complex (DISC) is critical for initiation of death-receptor-mediated apoptosis; however, paradoxically, CD95 also signals for cell survival. Here, we reconstitute a functional DISC using only purified CD95, FADD, and procaspase-8 and unveil a two-step activation mechanism involving both dimerization and proteolytic cleavage of procaspase-8 that is obligatory for death-receptor-induced apoptosis. Initially, dimerization yields active procaspase-8 with a very restricted substrate repertoire, limited to itself or c-FLIP. Proteolytic cleavage is then required to fully activate caspase-8, thereby permitting DISC-mediated cleavage of the critical exogenous apoptotic substrates, caspase-3 and Bid. This switch in catalytic activity and substrate range is a key determinant of DISC signaling, as cellular expression of noncleavable procaspase-8 mutants, which undergo DISC-mediated oligomerization, but not cleavage, fails to initiate CD95-induced apoptosis. Thus, using the reconstituted DISC, we have delineated a crucial two-step activation mechanism whereby activated death receptor complexes can trigger death or survival.