The damselfishes (Perciformes, Pomacentridae) are an important family of marine reef fishes that occupy a range of ecological positions in the world's oceans. In order to determine the evolutionary pattern of their radiation, we used multiple methods to examine molecular data from 104 species representing all extant genera. The analysis of 4291 DNA nucleotides (1281bp were parsimony informative) from three nuclear genes (rag-1, rag-2 and bmp-4) and three mitochondrial genes (12s, 16s and nd3), produced well-resolved phylogenies with strong evidence for a monophyletic Pomacentridae, and support for five major damselfish clades. We found that the monotypic subfamily Lepidozyginae evolved early in the pomacentrid radiation. The placement of the genus Altrichthys indicates that brood care has evolved at least twice among the damselfishes. The subfamilies Chrominae and Pomacentrinae, and the genera Abudefduf, Chromis, Chrysiptera, Plectroglyphidodon, and Stegastes, were always found to be polyphyletic, and monophyly was rejected for the genus Amphiprion by almost every analysis. All phylogenetic studies of the Pomacentridae have indicated that their taxonomy is in need of revision at multiple levels. We provide a new classification scheme wherein each subfamily is now monophyletic, and this reorganization is consistent with all previous molecular studies of the damselfishes. The Chrominae are restricted to the genera Chromis and Dascyllus; the Pomacentrinae now represent a lineage of 16 genera that constitute a major, and relatively recent, radiation of coral reef fishes throughout the Indo-West Pacific; we erect the new subfamlies Abudefdufinae and Stegastinae; we relegate the anemonefishes (the Amphiprioninae sensu Allen) to the tribe Amphiprionini within the Pomacentrinae, and synonomize the genus Azurina with Chromis.