Y chromosome degeneration is characterized by structural changes in the chromosome architecture and expansion of genetic inertness along the Y chromosome. It is generally assumed that the heteromorphic sex chromosome pair has developed from a pair of homologues. Several models have been suggested. We use the unique situation of the secondary sex chromosome pair, neo-Y and neo-X (X2), in Drosophila miranda to analyze molecular mechanisms involved in the evolutionary processes of Y chromosome degeneration. Due to the fusion of one of the autosomes to the Y chromosome (about 2 Mya), a neo-Y chromosome and a neo-X chromosome, designated X2, were formed. Thus, formerly autosomal genes are inherited now on a pair of sex chromosomes in D. miranda. Analyzing DNA sequences from the X2 and neo-Y region, we observed a massive accumulation of DNA insertions on the neo-Y chromosome. From the analysis of several insertion elements, we present compelling evidence that the first step in Y chromosome degeneration is driven by the accumulation of transposable elements, especially retrotransposons. An enrichment of these elements along an evolving Y chromosome could account for the switch from a euchromatic into a heterochromatic chromatin structure.