The Drosophila transcription factor Grainyhead regulates several key developmental processes. Three mammalian genes, CP2, LBP-1a and LBP-9 have been previously identified as homologues of grainyhead. We now report the cloning of two new mammalian genes (Mammalian grainyhead (MGR) and Brother-of-MGR (BOM)) and one new Drosophila gene (dCP2) that rewrite the phylogeny of this family. We demonstrate that MGR and BOM are more closely related to grh, whereas CP2, LBP-1a and LBP-9 are descendants of the dCP2 gene. MGR shares the greatest sequence homology with grh, is expressed in tissue-restricted patterns more comparable to grh and binds to and transactivates the promoter of the human Engrailed-1 gene, the mammalian homologue of the key grainyhead target gene, engrailed. This sequence and functional conservation indicates that the new mammalian members of this family play important developmental roles.