Although the possibility of gene evolution by domain rearrangements has long 
been appreciated, current methods for reconstructing and systematically 
analyzing gene family evolution are limited to events such as duplication, loss, 
and sometimes, horizontal transfer. However, within the Drosophila clade, we 
find domain rearrangements occur in 35.9% of gene families, and thus, any 
comprehensive study of gene evolution in these species will need to account for 
such events. Here, we present a new computational model and algorithm for 
reconstructing gene evolution at the domain level. We develop a method for 
detecting homologous domains between genes and present a phylogenetic algorithm 
for reconstructing maximum parsimony evolutionary histories that include domain 
generation, duplication, loss, merge (fusion), and split (fission) events. Using 
this method, we find that genes involved in fusion and fission are enriched in 
signaling and development, suggesting that domain rearrangements and reuse may 
be crucial in these processes. We also find that fusion is more abundant than 
fission, and that fusion and fission events occur predominantly alongside 
duplication, with 92.5% and 34.3% of fusion and fission events retaining 
ancestral architectures in the duplicated copies. We provide a catalog of ∼9,000 
genes that undergo domain rearrangement across nine sequenced species, along 
with possible mechanisms for their formation. These results dramatically expand 
on evolution at the subgene level and offer several insights into how new genes 
and functions arise between species.