Next Generation Sequencing technology is now being increasingly applied to study the within and between host population dynamics of viruses. However, information on avian influenza virus evolution and transmission during a naturally occurring epidemic is still limited. Here, we use deep sequencing data obtained from clinical samples collected from five industrial holdings and a backyard farm infected during the 2013 highly pathogenic avian influenza (HPAI) H7N7 epidemic in Italy to unravel i) the epidemic virus population diversity, ii) the evolution of virus pathogenicity, and iii) the pathways of viral transmission between different holdings and sheds. We show a high level of genetic diversity of the HPAI H7N7 viruses within a single farm as a consequence of separate bottlenecks and founder effects. In particular, we identified the co-circulation in the index case of two viral strains showing a different insertion at the Hemagglutinin cleavage site, as well as nine nucleotide differences at the consensus level and 92 minority variants. To assess inter-farm transmission, we combined epidemiological and genetic data and identified the index case as the major source of the virus, suggesting the spread of different viral haplotypes from the index farm to the other industrial holdings, probably at different time points. Our results revealed inter-farm transmission dynamics that the epidemiological data alone could not unravel and demonstrated that delay in the disease detection and stamping out was the major cause of the emergence and the spread of the HPAI strain.