Teleost fishes are characterized by a diversity of sexual patterns. Hermaphroditism, the expression of both male and female reproductive function in a single individual, generates the most curiosity and controversy. Yet diagnosis of this form of sexuality continues to challenge workers, in particular the distinction between functional and non-functional hermaphroditism. This distinction, reflected as it is in the relationships between gonad form and function, is important if we wish to improve our understanding of the origin of hermaphroditism in the teleosts and of its highly sporadic expression today. Although structure can indicate phylogenetic affinities, it does not always reflect reproductive function, and function is important for understanding adaptation. With resurgent interest in hermaphroditism comes the recognition that understanding sexual pattern is not only important for better knowledge of reproductive biology and ecology but may also elucidate phylogenetic relationships. On the basis of a conservative and clearly defined set of diagnostic criteria, which incorporate new accounts of hermaphroditic species, and by applying an improved understanding of gonadal ontogeny, a comprehensive review and careful re-examination of all primary literature was conducted. This overview documents the incidence of hermaphroditism in teleosts and explores its phylogenetic distribution, possible origin and range of expression. The review confirms functional hermaphroditism in 27 teleost families in seven orders, predominantly among tropical, marine perciforms in which its diversity of expression is greatest. In families with functional hermaphrodites, the sexual pattern is widespread and often highly variable in expression, even within a single genus or between populations. Based on our understanding of gonadal ontogeny in teleosts and on known phylogenetic interrelationships, the origin of functional hermaphroditism is most parsimoniously explained by a proto-hermaphroditic condition in teleosts and cyclostomes, constituting a hermaphroditic potential for these groups. Exploitation and expression of this potential appear to be a response to a suite of environmental and biological factors, opportunities and constraints that result in the independent appearance of the hermaphroditic option in many different fish lineages.