Colonization of a host by an active transposon can increase mutation rates or cause sterility, a phenotype termed hybrid dysgenesis. As an example, intercrosses of certain Drosophila virilis strains can produce dysgenic progeny. The Penelope element is present only in a subset of laboratory strains and has been implicated as a causative agent of the dysgenic phenotype. We have also introduced Penelope into Drosophila melanogaster, which are otherwise naive to the element. We have taken advantage of these natural and experimentally induced colonization processes to probe the evolution of small RNA pathways in response to transposon challenge. In both species, Penelope was predominantly targeted by endo-small-interfering RNAs (siRNAs) rather than by piwi-interacting RNAs (piRNAs). Although we do observe correlations between Penelope transcription and dysgenesis, we could not correlate differences in maternally deposited Penelope piRNAs with the sterility of progeny. Instead, we found that strains that produced dysgenic progeny differed in their production of piRNAs from clusters in subtelomeric regions, possibly indicating that changes in the overall piRNA repertoire underlie dysgenesis. Considered together, our data reveal unexpected plasticity in small RNA pathways in germ cells, both in the character of their responses to invading transposons and in the piRNA clusters that define their ability to respond to mobile elements.