Genome evolution of bacteria is usually influenced by ecology, such that bacteria with a free-living stage have large genomes and high rates of horizontal gene transfer, while obligate intracellular bacteria have small genomes with typically low amounts of gene exchange. However, recent studies indicate that obligate intracellular species that host-switch frequently harbor agents of horizontal transfer such as mobile elements. For example, the temperate double-stranded DNA bacteriophage WO in Wolbachia persistently transfers between bacterial coinfections in the same host. Here we show that despite the phage's rampant mobility between coinfections, the prophage's genome displays features of constraint related to its intracellular niche. First, there is always at least one intact prophage WO and usually several degenerate, independently-acquired WO prophages in each Wolbachia genome. Second, while the prophage genomes are modular in composition with genes of similar function grouping together, the modules are generally not interchangeable with other unrelated phages and thus do not evolve by the Modular Theory. Third, there is an unusual core genome that strictly consists of head and baseplate genes; other gene modules are frequently deleted. Fourth, the prophage recombinases are diverse and there is no conserved integration sequence. Finally, the molecular evolutionary forces acting on prophage WO are point mutation, intragenic recombination, deletion, and purifying selection. Taken together, these analyses indicate that while lateral transfer of phage WO is pervasive between Wolbachia with occasional new gene uptake, constraints of the intracellular niche obstruct extensive mixture between WO and the global phage population. Although the Modular Theory has long been considered the paradigm of temperate bacteriophage evolution in free-living bacteria, it appears irrelevant in phages of obligate intracellular bacteria.