Intramembrane proteases are important enzymes in biology. The recently solved crystal structures of rhomboid protease GlpG have provided useful insights into the mechanism of these membrane proteins. Besides revealing an internal water-filled cavity that harbored the Ser-His catalytic dyad, the crystal structure identified a novel structural domain (L1 loop) that lies on the side of the transmembrane helices. Here, using site-directed mutagenesis, we confirmed that the L1 loop is partially embedded in the membrane, and showed that alanine substitution of a highly preferred tryptophan (Trp136) at the distal tip of the L1 loop near the lipid:water interface reduced GlpG proteolytic activity. Crystallographic analysis showed that W136A mutation did not modify the structure of the protease. Instead, the polarity for a small and lipid-exposed protein surface at the site of the mutation has changed. The crystal structure, now refined at 1.7 A resolution, also clearly defined a 20-A-wide hydrophobic belt around the protease, which likely corresponded to the thickness of the compressed membrane bilayer around the protein. This improved structural model predicts that all critical elements of the catalysis, including the catalytic serine and the L5 cap, need to be positioned within a few angstroms of the membrane surface, and may explain why the protease activity is sensitive to changes in the protein:lipid interaction. Based on these findings, we propose a model where the end of the substrate transmembrane helix first partitions out of the hydrophobic core region of the membrane before it bends into the protease active site for cleavage.