A review of the effect of hydrolysis on the functional, sensory, and biological properties of proteins and protein hydrolysates has been done. Hydrolysis of relatively low number of peptide bonds leads to modification that can increase some functional properties, e.g. solubility and emulsifying capacity of the proteins. The products of extensive hydrolysis have no gel forming ability and may have a bitter taste depending on the number and sequence of hydrophobic amino acid residues. Many products of protein hydrolysis find very diversified applications as functional food additives and as designer foods of biomedical value.