A gene located within the intron of a larger gene is an uncommon arrangement in any species. Few of these nested gene arrangements have been explored from an evolutionary perspective. Here we report a phylogenetic analysis of kayak (kay) and fos intron gene (fig), a divergently transcribed gene located in a kay intron, utilizing 12 Drosophila species. The evolutionary relationship between these genes is of interest because kay is the homolog of the proto-oncogene c-fos whose function is modulated by serine/threonine phosphorylation and fig is a predicted PP2C phosphatase specific for serine/threonine residues. We found that, despite an extraordinary level of diversification in the intron-exon structure of kay (11 inversions and six independent exon losses), the nested arrangement of kay and fig is conserved in all species. A genomewide analysis of protein-coding nested gene pairs revealed that approximately 20% of nested pairs in D. melanogaster are also nested in D. pseudoobscura and D. virilis. A phylogenetic examination of fig revealed that there are three subfamilies of PP2C phosphatases in all 12 species of Drosophila. Overall, our phylogenetic and genomewide analyses suggest that the nested arrangement of kay and fig may be due to a functional relationship between them.