The ancient mechanisms that caused developmental gene regulatory networks to diversify among distantly related taxa are not well understood. Here we use ancestral protein reconstruction, biochemical experiments, and developmental assays of transgenic animals carrying reconstructed ancestral genes to investigate how the transcription factor Bicoid (Bcd) evolved its central role in anterior-posterior patterning in flies. We show that most of Bcd's derived functions are attributable to evolutionary changes within its homeodomain (HD) during a phylogenetic interval >140 million years ago. A single substitution from this period (Q50K) accounts almost entirely for the evolution of Bcd's derived DNA specificity in vitro. In transgenic embryos expressing the reconstructed ancestral HD, however, Q50K confers activation of only a few of Bcd's transcriptional targets and yields a very partial rescue of anterior development Adding a second historical substitution (M54R) confers regulation of additional Bcd targets and further rescues anterior development. These results suggest that two epistatically interacting mutations played a major role in the evolution of Bcd's controlling regulatory role in early development.