Male swordtail fish of the genus Xiphophorus (Poeciliidae) possess a "sword" that is composed of several colored elongated ventral fin rays of the caudal fin. The sword is a secondary sexual trait that evolved through sexual selection by female preference. To uncover the developmental mechanisms underlying the metamorphosis from a juvenile caudal fin to the sword, we have devised a transplantation protocol to assay the fate of single transplanted fin rays and their interactions with flanking rays. These experiments provide evidence for the existence of a previously unrecognized inductive signal that originates in those rays that develop into the two longest sword rays. This "sword organizer" causes adjacent fin rays to grow and become integrated into the sword and induces the development of an additional, typically pigmented sword in grafts to the dorsal part of the caudal fin. We show that the potential to develop a sword is restricted to certain parts of the caudal fin. Our findings suggest that the evolution of swords in swordtails required the acquisition of two developmental mechanisms: the establishment of signaling competence in prospective sword rays in the embryo or early larva, and its activation through androgen signaling in adult male fish.