The implementation of the Global Positioning System (GPS) network of satellites and the development of small, high-performance instrumentation to receive GPS signals have created an opportunity for active remote sounding of the Earth's atmosphere by radio occultation at comparatively low cost. A prototype demonstration of this capability has now been provided by the GPS/MET investigation. Despite using relatively immature technology, GPS/MET has been extremely successful [Ware et al., 1996; Kursinski et al., 1996], although there is still room for improvement. The aim of this paper is to develop a theoretical estimate of the spatial coverage, resolution, and accuracy that can be expected for atmospheric profiles derived from GPS occultations. We consider observational geometry, attenuation, and diffraction in defining the vertical range of the observations and their resolution. We present the first systematic, extensive error analysis of the spacecraft radio occultation technique using a combination of analytical and simulation methods to establish a baseline accuracy for retrieved profiles of refractivity, geopotential, and temperature. Typically, the vertical resolution of the observations ranges from 0.5 km in the lower troposphere to 1.4 km in the middle atmosphere. Results indicate that useful profiles of refractivity can be derived from ∼60 km altitude to the surface with the exception of regions less than 250 m in vertical extent associated with high vertical humidity gradients. Above the 250 K altitude level in the troposphere, where the effects of water are negligible, sub-Kelvin temperature accuracy is predicted up to ∼40 km depending on the phase of the solar cycle. Geopotential heights of constant pressure levels are expected to be accurate to ∼10 m or better between 10 and 20 km altitudes. Below the 250 K level, the ambiguity between water and dry atmosphere refractivity becomes significant, and temperature accuracy is degraded. Deep in the warm troposphere the contribution of water to refractivity becomes sufficiently large for the accurate retrieval of water vapor given independent temperatures from weather analyses [Kursinski et al., 1995]. The radio occultation technique possesses a unique combination of global coverage, high precision, high vertical resolution, insensitivity to atmospheric particulates, and long-term stability. We show here how these properties are well suited for several applications including numerical weather prediction and long-term monitoring of the Earth's climate.