Comparative genome analyses indicate that every taxonomic group so far studied contains 10-20% of genes that lack recognizable homologs in other species. Do such 'orphan' or 'taxonomically-restricted' genes comprise spurious, non-functional ORFs, or does their presence reflect important evolutionary processes? Recent studies in basal metazoans such as Nematostella, Acropora and Hydra have shed light on the function of these genes, and now indicate that they are involved in important species-specific adaptive processes. Here we focus on evidence from Hydra suggesting that taxonomically-restricted genes play a role in the creation of phylum-specific novelties such as cnidocytes, in the generation of morphological diversity, and in the innate defence system. We propose that taxon-specific genes drive morphological specification, enabling organisms to adapt to changing conditions.