The existing classification of human Alu sequences is revised and expanded using a novel methodology and a larger set of sequence data. Our study confirms that there are two major Alu subfamilies, Alu-J and Alu-S. The Alu-S subfamily consists of at least five distinct subfamilies referred to as Alu-Sx, Alu-Sq, Alu-Sp, Alu-Sc, and Alu-Sb. The Alu-Sp and Alu-Sq subfamilies have been revealed by this study. Alu subfamilies differ from one another in a number of positions called diagnostic. In this paper the diagnostic positions are defined in quantitative terms and are used to evaluate statistical significance of the observed subfamilies. Each Alu subfamily most likely represents pseudogenes retroposed from evolving functional source Alu genes. Evidence presented in this paper indicates that Alu-Sp and Alu-Sc pseudogenes were retroposed from different source genes, during overlapping periods of time, and at different rates. Our analysis also indicates that the previously identified Alu-type transcript BC200 comes from an active Alu gene that might have existed even before the origin of dimeric Alu sequences. The source genes for Alu pseudogene families are reconstructed. It is assumed that diagnostic differences between reconstructed source genes reflect mutations that have occurred in true source Alu genes under natural selection. Some of these mutations are compensatory and are used to reconstruct a common secondary structure of Alu RNAs transcribed from the source genes. The biological function of Alu RNA is discussed in the context of its homology to the elongation-arresting domain of 7SL RNA. Practical implications of our analyses for studies of the human and of other primate genomes are outlined. A computer program that identifies diagnostic bases in individual Alu repeats is designed and made available on-line.