Phase variable restriction-modification (R-M) systems are widespread in Eubacteria. Haemophilus influenzae encodes a phase variable homolog of Type III R-M systems. Sequence analysis of this system in 22 non-typeable H.influenzae isolates revealed a hypervariable region in the central portion of the mod gene whereas the res gene was conserved. Maximum likelihood (ML) analysis indicated that most sites outside this hypervariable region experienced strong negative selection but evidence of positive selection for a few sites in adjacent regions. A phylogenetic analysis of 61 Type III mod genes revealed clustering of these H.influenzae mod alleles with mod genes from pathogenic Neisseriae and, based on sequence analysis, horizontal transfer of the mod-res complex between these species. Neisserial mod alleles also contained a hypervariable region and all mod alleles exhibited variability in the repeat tract. We propose that this hypervariable region encodes the target recognition domain (TRD) of the Mod protein and that variability results in alterations to the recognition sequence of this R-M system. We argue that the high allelic diversity and phase variable nature of this R-M system have arisen due to selective pressures exerted by diversity in bacteriophage populations but also have implications for other fitness attributes of these bacterial species.