The dynamics of reductive genome evolution for eukaryotes living inside other eukaryotic cells are poorly understood compared to well-studied model systems involving obligate intracellular bacteria. Here we present 8.5 Mb of sequence from the genome of the microsporidian Trachipleistophora hominis, isolated from an HIV/AIDS patient, which is an outgroup to the smaller compacted-genome species that primarily inform ideas of evolutionary mode for these enormously successful obligate intracellular parasites. Our data provide detailed information on the gene content, genome architecture and intergenic regions of a larger microsporidian genome, while comparative analyses allowed us to infer genomic features and metabolism of the common ancestor of the species investigated. Gene length reduction and massive loss of metabolic capacity in the common ancestor was accompanied by the evolution of novel microsporidian-specific protein families, whose conservation among microsporidians, against a background of reductive evolution, suggests they may have important functions in their parasitic lifestyle. The ancestor had already lost many metabolic pathways but retained glycolysis and the pentose phosphate pathway to provide cytosolic ATP and reduced coenzymes, and it had a minimal mitochondrion (mitosome) making Fe-S clusters but not ATP. It possessed bacterial-like nucleotide transport proteins as a key innovation for stealing host-generated ATP, the machinery for RNAi, key elements of the early secretory pathway, canonical eukaryotic as well as microsporidian-specific regulatory elements, a diversity of repetitive and transposable elements, and relatively low average gene density. Microsporidian genome evolution thus appears to have proceeded in at least two major steps: an ancestral remodelling of the proteome upon transition to intracellular parasitism that involved reduction but also selective expansion, followed by a secondary compaction of genome architecture in some, but not all, lineages.