BACKGROUND: With the increasing availability of whole genome sequences, it is becoming more and more important to use complete genome sequences for inferring species phylogenies. We developed a new tool ComPhy, 'Composite Distance Phylogeny', based on a composite distance matrix calculated from the comparison of complete gene sets between genome pairs to produce a prokaryotic phylogeny. RESULTS: The composite distance between two genomes is defined by three components: Gene Dispersion Distance (GDD), Genome Breakpoint Distance (GBD) and Gene Content Distance (GCD). GDD quantifies the dispersion of orthologous genes along the genomic coordinates from one genome to another; GBD measures the shared breakpoints between two genomes; GCD measures the level of shared orthologs between two genomes. The phylogenetic tree is constructed from the composite distance matrix using a neighbor joining method. We tested our method on 9 datasets from 398 completely sequenced prokaryotic genomes. We have achieved above 90% agreement in quartet topologies between the tree created by our method and the tree from the Bergey's taxonomy. In comparison to several other phylogenetic analysis methods, our method showed consistently better performance. CONCLUSION: ComPhy is a fast and robust tool for genome-wide inference of evolutionary relationship among genomes. It can be downloaded from http://digbio.missouri.edu/ComPhy.