The transition from aquatic to terrestrial eggs is a key evolutionary change that has allowed vertebrates to successfully colonize and exploit the land. Although most amphibians retain the primitive biphasic life cycle (eggs deposited in water that hatch into free-living aquatic larvae), direct development of terrestrial eggs has evolved repeatedly and may have been critical to the evolutionary success of several amphibian groups. We provide the first conclusive evidence for evolutionary reversal of direct development in vertebrates. The family Plethodontidae (lungless salamanders) contains the majority of salamander species, including major radiations of direct developers. We reconstruct the higher level phylogenetic relationships of plethodontid salamanders using molecular and morphological data and use this phylogeny to examine the evolution of direct development. We show that the predominantly biphasic desmognathines, previously considered the sister group of other plethodontids, are nested inside a group of direct-developing species (Plethodontini) and have re-evolved the aquatic larval stage. Rather than being an evolutionary dead end, the reversal from direct developing to biphasic life history may have helped communities in eastern North America to achieve the highest local diversity of salamander species in the world.