We describe the draft genome of the microcrustacean Daphnia pulex, which is only 200 megabases and contains at least 30,907 genes. The high gene count is a consequence of an elevated rate of gene duplication resulting in tandem gene clusters. More than a third of Daphnia's genes have no detectable homologs in any other available proteome, and the most amplified gene families are specific to the Daphnia lineage. The coexpansion of gene families interacting within metabolic pathways suggests that the maintenance of duplicated genes is not random, and the analysis of gene expression under different environmental conditions reveals that numerous paralogs acquire divergent expression patterns soon after duplication. Daphnia-specific genes, including many additional loci within sequenced regions that are otherwise devoid of annotations, are the most responsive genes to ecological challenges.