To examine the role of development in the origin of evolutionary novelties, we investigated the developmental mechanisms involved in the formation of a complex morphological novelty-branched feathers. We demonstrate that the anterior-posterior expression polarity of Sonic hedgehog (Shh) and Bone morphogenetic protein 2 (Bmp2) in the primordia of feathers, avian scales, and alligator scales is conserved and phylogenetically primitive to archosaurian integumentary appendages. In feather development, derived patterns of Shh-Bmp2 signaling are associated with the development of evolutionarily novel feather structures. Longitudinal Shh-Bmp2 expression domains in the marginal plate epithelium between barb ridges provide a prepattern of the barbs and rachis. Thus, control of Shh-Bmp2 signaling is a fundamental component of the mechanism determining feather form (i.e., plumulaceous vs. pennaceous structure). We show that Shh signaling is necessary for the formation and proper differentiation of a barb ridge and that it is mediated by Bmp signaling. BMP signaling is necessary and sufficient to negatively regulate Shh expression within forming feather germs and this epistatic relationship is conserved in scale morphogenesis. Ectopic SHH and BMP2 signaling leads to opposing effects on proliferation and differentiation within the feather germ, suggesting that the integrative signaling between Shh and Bmp2 is a means to regulate controlled growth and differentiation of forming skin appendages. We conclude that Shh and Bmp signaling is necessary for the formation of barb ridges in feathers and that Shh and Bmp2 signaling constitutes a functionally conserved developmental signaling module in archosaur epidermal appendage development. We propose a model in which branched feather form evolved by repeated, evolutionary re-utilization of a Shh-Bmp2 signaling module in new developmental contexts. Feather animation Quicktime movies can be viewed at http://fallon.anatomy.wisc.edu/feather.html.