The arthropod Down syndrome cell adhesion molecule (Dscam) gene can generate tens of thousands of protein isoforms via combinatorial splicing of numerous alternative exons encoding immunoglobulin variable domains organized into three clusters referred to as the exon 4, 6, and 9 clusters. Dscam protein diversity is important for nervous system development and immune functions. We have performed extensive phylogenetic analyses of Dscam from 20 arthropods (each containing between 46 and 96 alternative exons) to reconstruct the detailed history of exon duplication and loss events that built this remarkable system over 450 million years of evolution. Whereas the structure of the exon 4 cluster is ancient, the exon 6 and 9 clusters have undergone massive, independent expansions in each insect lineage. An analysis of nearly 2000 duplicated exons enabled detailed reconstruction of the timing, location, and boundaries of these duplication events. These data clearly show that new Dscam exons have arisen continuously throughout arthropod evolution and that this process is still occurring in the exon 6 and 9 clusters. Recently duplicated regions display boundaries corresponding to a single exon and the adjacent intron. The boundaries, homology, location, clustering, and relative frequencies of these duplication events strongly suggest that staggered homologous recombination is the major mechanism by which new Dscam exons evolve. These data provide a remarkably detailed picture of how complex gene structure evolves and reveal the molecular mechanism behind this process.