<p>Abstract</p> <p>Background</p> <p>Functional and comparative studies of insect genomes have shed light on the complement of genes, which in part, account for shared morphologies, developmental programs and life-histories. Contrasting the gene inventories of insects to those of the nematodes provides insight into the genomic changes responsible for their diversification. However, nematodes have weak relationships to insects, as each belongs to separate animal phyla. A better outgroup to distinguish lineage specific novelties would include other members of Arthropoda. For example, crustaceans are close allies to the insects (together forming Pancrustacea) and their fascinating aquatic lifestyle provides an important comparison for understanding the genetic basis of adaptations to life on land versus life in water.</p> <p>Results</p> <p>This study reports on the first characterization of cDNA libraries and sequences for the model crustacean <it>Daphnia pulex</it>. We analyzed 1,546 ESTs of which 1,414 represent approximately 787 nuclear genes, by measuring their sequence similarities with insect and nematode proteomes. The provisional annotation of genes is supported by expression data from microarray studies described in companion papers. Loci expected to be shared between crustaceans and insects because of their mutual biological features are identified, including genes for reproduction, regulation and cellular processes. We identify genes that are likely derived within Pancrustacea or lost within the nematodes. Moreover, lineage specific gene family expansions are identified, which suggest certain biological demands associated with their ecological setting. In particular, up to seven distinct ferritin loci are found in <it>Daphnia </it>compared to three in most insects. Finally, a substantial fraction of the sampled gene transcripts shares no sequence similarity with those from other arthropods. Genes functioning during development and reproduction are comparatively well conserved between crustaceans and insects. By contrast, genes that were responsive to environmental conditions (metal stress) and not sex-biased included the greatest proportion of genes with no matches to insect proteomes.</p> <p>Conclusion</p> <p>This study along with associated microarray experiments are the initial steps in a coordinated effort by the <it>Daphnia </it>Genomics Consortium to build the necessary genomic platform needed to discover genes that account for the phenotypic diversity within the genus and to gain new insights into crustacean biology. This effort will soon include the first crustacean genome sequence.</p