Bordetella bacteriophages generate diversity in a gene that specifies host tropism. This microevolutionary adaptation is produced by a genetic element that combines the basic retroelement life cycle of transcription, reverse transcription and integration with site-directed, adenine-specific mutagenesis. Central to this process is a reverse transcriptase-mediated exchange between two repeats; one serving as a donor template (TR) and the other as a recipient of variable sequence information (VR). Here we describe the genetic basis for diversity generation. The directionality of information transfer is determined by a 21-base-pair sequence present at the 3' end of VR. On the basis of patterns of marker transfer in response to variant selective pressures, we propose that a TR reverse transcript is mutagenized, integrated into VR as a single non-coding strand, and then partially converted to the parental VR sequence. This allows the diversity-generating system to minimize variability to the subset of bases under selection. Using the Bordetella phage cassette as a signature, we have identified numerous related elements in diverse bacteria. These elements constitute a new family of retroelements with the potential to confer selective advantages to their host genomes.