The evolutionary relationship within prokaryotes is examined based on signature sequences (defined as conserved inserts or deletions shared by specific taxa) and phylogenies derived from different proteins. Archaebacteria are indicated as being monophyletic by a number of proteins related to the information transfer processes. In contrast, for several other highly conserved proteins, common signature sequences are present in archaebacteria and Gram-positive bacteria, whereas Gram-negative bacteria are indicated as being distinct. For these proteins, archaebacteria do not form a phylogenetically distinct clade but show polyphyletic branching within Gram-positive bacteria. A closer relationship of archaebacteria to Gram-positive bacteria in comparison with Gram-negative bacteria is generally seen for the majority of the available gene/ protein sequences. To account for these results and the fact that both archaebacteria and Gram-positive bacteria are prokaryotes surrounded by a single cell membrane, I propose that the primary division within prokaryotes is between monoderm prokaryotes (surrounded by a single membrane) and diderm prokaryotes (i.e. all true Gram-negative bacteria containing both an inner cytoplasmic membrane and an outer membrane). This proposal is consistent with both cell morphology and signature sequences in different proteins. The monophyletic nature of archaebacteria for some genes, and their polyphyletic branching within Gram-positive bacteria as suggested by others, is critically examined, and several explanations, including derivation of archaebacteria from Gram-positive bacteria in response to antibiotic selection pressure, are proposed. Signature sequences in proteins also indicate that the low-G+C Gram-positive bacteria are phylogenetically distinct from the high-G+C Gram-positive group and that the diderm prokaryotes (i.e. Gram-negative bacteria) appear to have evolved from the latter group. Protein phylogenies and signature sequences also show that all eukaryotic cells have received significant gene contributions from both an archaebacterium and a Gram-negative eubacterium. Thus, the hypothesis that archaebacteria and eukaryotes shared a common ancestor exclusive of eubacteria is not supported. These observations provide evidence for an alternate view of the evolutionary relationship among living organisms that is different from the currently popular three-domain proposal.