Since its discovery in the 1980s, the fatty acid hydroxylase flavocytochrome P450 (cytochrome P450) BM3 (CYP102A1) from Bacillus megaterium has been adopted as a paradigm for the understanding of structure and mechanism in the P450 superfamily of enzymes. P450 BM3 was the first P450 discovered as a fusion to its redox partner--a eukaryotic-like diflavin reductase. This fact fuelled the interest in soluble P450 BM3 as a model for the mammalian hepatic P450 enzymes, which operate a similar electron transport chain using separate, membrane-embedded P450 and reductase enzymes. Structures of each of the component domains of P450 BM3 have now been resolved and detailed protein engineering and molecular enzymology studies have established roles for several amino acids in, e.g. substrate binding, coenzyme selectivity and catalysis. The potential of P450 BM3 for biotechnological applications has also been recognized, with variants capable of industrially important transformations generated using rational mutagenesis and forced evolution techniques. This paper focuses on recent developments in our understanding of structure and mechanism of this important enzyme and highlights important problems still to be resolved. ; 108671