Few studies show how morphological vestigialization may facilitate functional innovation. Fewer still describe the co-occurrence of the derived and more ancestral structures in the same genetic individual. In the present study, we explore that rare instance in a modular (colonial) marine invertebrate. Using laser scanning confocal microscopy with fluorescent staining and behavioural observations, we describe homologous structures in polymorphic modules (zooids) in the bryozoan Bugula flabellata and document the occurrence of previously unreported retractor and circular muscles in the more derived module, the bird's-head avicularium. In the evolution of a sessile feeding zooid to a moveable nonfeeding zooid with sensory and grasping functions, transformations were effected in the food-capture apparatus, orificial structures, musculature, and sensory structures. We expand on and clarify previous reports of homologies between ancestral and derived modules in bryozoans and argue that vestigialization and augmentation of homologous structures were coincident with functional innovations in the avicularium. The present study offers rare evidence for the evolution of functional innovation through vestigialization.