The well-researched Escherichia coli genome offers the opportunity to explore the value of using protein families within a single organism to enrich functional annotation procedures and to study mechanisms of protein evolution. Having identified multimodular proteins resulting from gene fusion, and treated each module as a separate protein, nonoverlapping sequence-similar families in E. coli could be assembled. Of 3,902 proteins of length 100 residues or more, 2,415 clustered into 609 protein families. The relatedness of function among members of each family was dissected in detail. Data on paralogous protein families provides valuable information in attributing putative function to unknown genes, supplementing existing function annotation. Enzymes, transporters, and regulators represent the three major types of proteins in E. coli. They are shown to have distinctive patterns in gene duplication and divergence and gene fusion, suggesting that details of protein evolution have been different for genes in these categories. Data for the complete list of paralogous protein families and updated functional annotation for E. coli K-12 are accessible in GenProtEC.