Functional analysis of fossils is and should remain a key component of paleobiological research. Despite recently expressed doubts, conceptual and methodological developments over the past 25 years indicate that robust and testable claims about function can be produced. Functional statements can be made in at least three different hierarchical contexts, corresponding to the degree of structural information available, the position in the phylogenetic hierarchy, and the degree of anatomical specificity. The paradigm approach, which dominated thinking about function in the 1960s and 1970s, has been supplanted with a methodology based on biomechanics. Paleobiomechanics does not assume optimality in organismal design, but determines whether structures were capable of carrying out a given function. The paradigm approach can best be viewed as a way of generating, rather than testing, functional hypotheses. Hypotheses about function can also be developed and supported by well-corroborated phylogenetic arguments. Additional functional evidence can be derived from studies of trace fossils and of taphonomy. New computer techniques, including “Artificial Life” studies, have the potential for producing far more detailed ideas about function and mode of life than have been previously possible. Functional analysis remains the basis for studies of the history of adaptation. It is also an essential component of many paleoecological and paleoenvironmental studies.