Energy-dependent proteolysis in rabbit reticulocyte lysates has an absolute requirement for both ATP and ubiquitin that is believed due to the ATP-dependent covalent conjugation of ubiquitin (Ub) to substrate proteins as a signal event. Recently the enzyme responsible for activation of ubiquitin has been purified to near homogeneity by covalent affinity chromatography. In the present work we demonstrate that the enzyme catalyzes the net reaction (formula: see text); in which both an enzyme-bound COOH-terminal ubiquitin thiolester and a COOH-terminal ubiquitin adenylate are formed. The complex is sufficiently stable to be isolated by exclusion chromatography and contains ubiquitin/AMP in a ratio of 2. The presence of two forms of covalently linked ubiquitin provides a rationale for the observation of both ubiquitin-dependent ATP:PPi and ATP:AMP exchange. Selective derivatization of the thiol site with iodoacetamide results in a modified enzyme capable of catalyzing only ATP:PPi exchange and in forming only ubiquitin adenylate. Derivatization of the thiol site prevents conjugate formation in a reconstituted system, demonstrating that the ubiquitin thiolester is the proximal donor for subsequent conjugate formation. A three-step mechanism is proposed for ubiquitin activation by the enzyme prior to conjugation.