The highly specialized genomes of bacterial endosymbionts typically lack one of the major contributors of genomic flux in the free-living microbial world-bacteriophages. This study yields three results that show bacteriophages have, to the contrary, been influential in the genome evolution of the most prevalent bacterial endosymbiont of invertebrates, Wolbachia. First, we show that bacteriophage WO is more widespread in Wolbachia than previously recognized, occurring in at least 89% (35/39) of the sampled genomes. Second, we show through several phylogenetic approaches that bacteriophage WO underwent recent lateral transfers between Wolbachia bacteria that coinfect host cells in the dipteran Drosophila simulans and the hymenopteran Nasonia vitripennis. These two cases, along with a previous report in the lepidopteran Ephestia cautella, support a general mechanism for genetic exchange in endosymbionts--the "intracellular arena" hypothesis--in which genetic material moves horizontally between bacteria that coinfect the same intracellular environment. Third, we show recombination in this bacteriophage; in the region encoding a putative capsid protein, the recombination rate is faster than that of any known recombining genes in the endosymbiont genome. The combination of these three lines of genetic evidence indicates that this bacteriophage is a widespread source of genomic instability in the intracellular bacterium Wolbachia and potentially the invertebrate host. More generally, it is the first bacteriophage implicated in frequent lateral transfer between the genomes of bacterial endosymbionts. Gene transfer by bacteriophages could drive significant evolutionary change in the genomes of intracellular bacteria that are typically considered highly stable and prone to genomic degradation.