The serine hydrolase, fatty acid amide hydrolase (FAAH), is responsible for the intracellular degradation of anandamide and other bioactive fatty acid ethanolamides involved in the regulation of pain, inflammation, and other pathophysiological processes. The catalytic site of FAAH is composed of multiple cavities with mixed hydrophobic and hydrophilic properties, the role of which remains incompletely understood. Anandamide is thought to enter the active site through a "membrane-access" (MA) channel and position its flexible fatty acyl chain in a highly hydrophobic "acyl chain-binding" (AB) cavity to allow for hydrolysis to occur. Using microsecond molecular dynamics (MD) simulations of FAAH embedded in a realistic membrane/water environment, we show now that anandamide may not lock itself into the AB cavity but may rather assume catalytically significant conformations required for hydrolysis by moving its flexible arachidonoyl tail between the MA and AB cavities. This process is regulated by a phenylalanine residue (Phe432) located at the boundary between the two cavities, which may act as a "dynamic paddle." The results identify structural flexibility as a key determinant by which FAAH recognizes its primary lipid substrate.