The presence of shared conserved insertion or deletions (indels) in protein sequences is a special type of signature sequence that shows considerable promise for phylogenetic inference. An alternative model of microbial evolution based on the use of indels of conserved proteins and the morphological features of prokaryotic organisms is proposed. In this model, extant archaebacteria and gram-positive bacteria, which have a simple, single-layered cell wall structure, are termed monoderm prokaryotes. They are believed to be descended from the most primitive organisms. Evidence from indels supports the view that the archaebacteria probably evolved from gram-positive bacteria, and I suggest that this evolution occurred in response to antibiotic selection pressures. Evidence is presented that diderm prokaryotes (i.e., gram-negative bacteria), which have a bilayered cell wall, are derived from monoderm prokaryotes. Signature sequences in different proteins provide a means to define a number of different taxa within prokaryotes (namely, low G+C and high G+C gram-positive, Deinococcus-Thermus, cyanobacteria, chlamydia-cytophaga related, and two different groups of Proteobacteria) and to indicate how they evolved from a common ancestor. Based on phylogenetic information from indels in different protein sequences, it is hypothesized that all eukaryotes, including amitochondriate and aplastidic organisms, received major gene contributions from both an archaebacterium and a gram-negative eubacterium. In this model, the ancestral eukaryotic cell is a chimera that resulted from a unique fusion event between the two separate groups of prokaryotes followed by integration of their genomes.