The P instability factor or PIF superfamily of DNA transposons constitutes an important group of transposable elements (TEs) in plants, but it is still poorly characterized in metazoans. Taking advantage of the availability of draft genome sequences for twelve Drosophila species, we discovered 4 different lineages of Drosophila PIF-like transposons, named DPLT1-4. These lineages have experienced a complex evolutionary history during the Drosophila radiation, involving differential amplification and retention among species and probable events of horizontal transmission. Like previously described plant and animal PIF transposons, full-length DPLTs encode a putative transposase as well as a second predicted protein containing a Myb/SANT domain. In DPLTs, this domain is most closely related to the MADF DNA-binding domain found in several Drosophila transcription factors. In addition, we identified 7 distinct genes distributed across the Drosophila genus that encode proteins related to PIF transposases, but lack the hallmarks of transposons. Instead, these sequences show features of functional genes, such as an intact coding region evolving under purifying selection, the presence of orthologs in at least 2 Drosophila species, and the conservation of intron/exon structure across orthologs. We also provide evidence that most of these genes are transcribed and that some are developmentally regulated. Together the data indicate that these genes derived from PIF-transposons that have been "domesticated" to serve cellular functions. In one instance the recruitment of the transposase gene was accompanied by the co-recruitment of the adjacent second PIF gene, which raises the hypothesis that both proteins now function in the same pathway. The second PIF gene has retained the capacity to encode a protein with an intact MADF domain, suggesting that it may function as a transcription factor. We conclude that PIF transposons are common in the Drosophila lineage and have been a recurrent source of new genes during Drosophila evolution.