The approximately 16 kb genome of the Mycoplasma fermentans phiMFV1 prophage is described, and its mobility, replication and effect on the mycoplasma surface phenotype are demonstrated. In various M. fermentans strains, phiMFV1 was either absent or integrated at diverse (and sometimes multiple) chromosomal sites, each marked by a conserved TTTTTA target sequence that is duplicated upon integration. Precise excision, replication of an extrachromosomal form and loss of phiMFV1 from the mycoplasmal genome were documented in a series of clonal derivatives of M. fermentans propagated in culture. Of 18 open reading frames (ORFs) encoded by phiMFV1, most can be ascribed functions related to phage biology, whereas one encodes a unique coiled-coil membrane surface protein, Mem, that was confirmed to be expressed in propagating populations of M. fermentans. With the exception of Mem and other minor ORFs, the striking similarity between the deduced proteomes of phiMFV1 and the recently described phiMAV1 of arthritogenic strains of Mycoplasma arthritidis, along with the prominent gene synteny between these elements, provides the taxonomic basis for a new family of prophage. Their coding features are consistent with long-term residence in mycoplasma genomes and the divergence of species within a phylogenetic clade of mycoplasmas. The unique Mem protein expressed from phiMFV1 and the unique hypothetical surface lipoproteins encoded by phiMAV1 and phiMFV1 also suggest that prophage-associated genes may provide specific, selectable phenotypic traits during co-evolution of mycoplasma species with their respective mammalian hosts. Retention of these labile prophage elements in organisms with such drastically reduced genome sizes implies a significant role in adaptation and survival.