Ubiquitin modification of many protein targets within cells plays important roles in a variety of biological processes. Among these are regulation of gene expression, regulation of cell cycle and division, involvement in the cellular stress response, modification of cell surface receptors, DNA repair, import of proteins into mitochondria, uptake of precursors of neurotransmitters into synaptosomes, biogenesis of peroxisomes, assembly of ribosomes, and programmed cell death. The mechanisms that underlie these complex processes are poorly understood. The best studied modification occurs in the ubiquitin-mediated proteolytic pathway. Recent experimental evidence indicates that the ubiquitin system is involved in the degradation of mitotic cyclins, oncoproteins and tumor suppressors, in the removal of abnormal and otherwise damaged proteins, and in processing of antigens restricted to class I MHC molecules. Degradation of a protein via the ubiquitin system involves two discrete steps. Initially, multiple ubiquitin molecules are covalently linked in an ATP-dependent mode to the protein substrate. The targeted protein is then degraded by a specific, energy-dependent and high molecular mass protease complex into peptides and free amino acids, and free and reutilizable ubiquitin is released. In addition, stable mono-ubiquitin adducts are also found in the cell, for example, those involving nucleosomal histones. Despite the considerable progress that has been made in elucidating the mode of action and roles of the ubiquitin system, many problems remain unsolved. For example, little is known on the signals that target proteins for degradation. While a few proteins are targeted for degradation following recognition of their N-terminal amino acid residue, the vast majority of cellular proteins are targeted by other signals. The identity of the native cellular substrates of the system is another important, yet unresolved problem: only a few proteins have been recognized so far as substrates of the system in vivo. The scope of this review is to discuss the mechanisms involved in ubiquitin activation, selection of substrates for conjugation, and degradation of ubiquitin-conjugated proteins in the cell-free system. In addition, we shall summarize what is currently known of the physiological roles of ubiquitin-mediated proteolysis in vivo.