Tardigrada, a phylum of meiofaunal organisms, have been at the center of discussions of the evolution of Metazoa, the biology of survival in extreme environments, and the role of horizontal gene transfer in animal evolution. Tardigrada are placed as sisters to Arthropoda and Onychophora (velvet worms) in the superphylum Panarthropoda by morphological analyses, but many molecular phylogenies fail to recover this relationship. This tension between molecular and morphological understanding may be very revealing of the mode and patterns of evolution of major groups. Limnoterrestrial tardigrades display extreme cryptobiotic abilities, including anhydrobiosis and cryobiosis, as do bdelloid rotifers, nematodes, and other animals of the water film. These extremophile behaviors challenge understanding of normal, aqueous physiology: how does a multicellular organism avoid lethal cellular collapse in the absence of liquid water? Meiofaunal species have been reported to have elevated levels of horizontal gene transfer (HGT) events, but how important this is in evolution, and particularly in the evolution of extremophile physiology, is unclear. To address these questions, we resequenced and reassembled the genome of H. dujardini, a limnoterrestrial tardigrade that can undergo anhydrobiosis only after extensive pre-exposure to drying conditions, and compared it to the genome of R. varieornatus, a related species with tolerance to rapid desiccation. The 2 species had contrasting gene expression responses to anhydrobiosis, with major transcriptional change in H. dujardini but limited regulation in R. varieornatus. We identified few horizontally transferred genes, but some of these were shown to be involved in entry into anhydrobiosis. Whole-genome molecular phylogenies supported a Tardigrada+Nematoda relationship over Tardigrada+Arthropoda, but rare genomic changes tended to support Tardigrada+Arthropoda.