Properly approached, molecular sequence data is a rich source of knowledge capable of teaching us much about the structure, function, and evolution of biological macromolecules. To effectively realize this potential, however, some understanding of the process of and theoretical basis for sequence comparison is needed as well as a variety of practical tools to access and manipulate the data. The volume of molecular sequence data has long since surpassed human information processing capacity for even simple tasks such as searching for related sequences, and with the ever increasing rate at which new sequences are being produced, the need for computer-assisted analysis becomes more and more acute. Automated tools can extend human capabilities by orders of magnitude in both speed and accuracy. The educated application of these automated tools is an essential part of modern molecular biology research. This chapter considers the theory and practice of analyzing sequence similarity as it applies to database searching and sequence alignment. Five major areas will be examined. First, we describe the use of dot matrix plots to elucidate the structures and features relating a sequence pair. Secondly, we discuss optimal pairwise alignment of sequences using dynamic programming algorithms. Thirdly, we examine fast, approximate techniques for detecting local similarities. Fourthly, the uses of and techniques for multiple sequence alignment are described. Finally, the statistical significance of sequence similarity is considered. In the analysis of molecular sequences, the terms similarity andhomology are often used without a clear understanding of their distinct implications. Similarity is a descriptive term which only implies that two sequences, by some criterion, resemble each other and carries no suggestion as to their origins or ancestry. Homology refers specifically to similarity due to descent from a common ancestor (Patterson, 1988;Reeck etal., 1987). On the basis of similarity relationships among a group of sequences, it may be possible to infer homology, but outside of an explicit laboratory model system, descent from a common ancestor remains hypothetical. There are philosophical issues in the inference of homology as well as practical ones. In classical morphology, conjunction (the occurrence of two traits in a single individual) is considered evidence that they are not homologous (Patterson, 1982).