The transfer of genetic material and integration of the material into a genome via recombination are important in gene repair, maintenance of genetic variation, and initiation of DNA replication in prokaryotes. Lateral transfer of genetic materials between two species creates mosaic phylogenetic relationships in different regions across genomes, complicating the inference of a single species phylogeny based on gene sequences. To date, most studies of genetic transfer in prokaryotes have been restricted by the implicit assumption that the units of genetic transfer are whole genes. This thesis documents the implementation of a rigorous phylogenetic approach in the first systematic study of the unit of genetic transfer in prokaryotes. Two core aspects of the thesis are reviewed in detail: (a) the modelling of sequence changes in the study of molecular evolution, and (b) the detection of recombination (thus genetic transfer) in molecular sequences. A ‘shotgun’ strategy is adopted to obtain optimal sequence alignments for subsequent analysis of genetic transfer, in which multiple alignments resulting from various algorithms were validated using a novel pattern-centric objective function presented in this work. A two-phase strategy is introduced to detect recombination at large scale: simple statistical tests are used to detect phylogenetic discrepancies within a group of sequences, and a rigorous Bayesian phylogenetic approach is then used to locate more precisely the breakpoints at which the recombination occurred. To formulate this strategy, an extensive benchmark study on various recombination-detecting approaches was conducted using simulated sequence data, focusing on the effects of subsequent evolutionary events in obscuring recombination. The alignment and recombination-detection strategies were applied to analyse the units of genetic transfer in (a) single-copy gene families from 144 prokaryote genomes and in (b) single-copy and multicopy gene families from 13 Staphylococcus genomes. In prokaryotes, within-gene (fragmentary) genetic transfer is generally more frequent than whole-gene transfer in singlecopy gene families. In Staphylococcus, however, both within-gene and whole-gene transfer contribute almost evenly. The units of fragmentary genetic transfer are found to correlate with protein structural features. A significant functional bias of whole-gene transfer was observed in single-copy and in multi-copy gene families of Staphylococcus, suggesting that fixation of an exogenous gene is influenced by the presence of similar gene copies in the target genome. This work demonstrates that units of genetic transfer in prokaryotes are not restricted to whole genes, and the extent of genetic transfer in prokaryotes could have been underestimated. The results support the view that both genetic transfer and gene duplication contribute to functional innovation in prokaryote genomes.