Mushroom bodies (MBs) are the centers for olfactory associative learning and elementary cognitive functions in the arthropod brain. In order to understand the cellular and genetic processes that control the early development of MBs, we have performed high-resolution neuroanatomical studies of the embryonic and post-embryonic development of the Drosophila MBs. In the mid to late embryonic stages, the pioneer MB tracts extend along Fasciclin II (FAS II)-expressing cells to form the primordia for the peduncle and the medial lobe. As development proceeds, the axonal projections of the larval MBs are organized in layers surrounding a characteristic core, which harbors bundles of actin filaments. Mosaic analyses reveal sequential generation of the MB layers, in which newly produced Kenyon cells project into the core to shift to more distal layers as they undergo further differentiation. Whereas the initial extension of the embryonic MB tracts is intact, loss-of-function mutations of fas II causes abnormal formation of the larval lobes. Mosaic studies demonstrate that FAS II is intrinsically required for the formation of the coherent organization of the internal MB fascicles. Furthermore, we show that ectopic expression of FAS II in the developing MBs results in severe lobe defects, in which internal layers also are disrupted. These results uncover unexpected internal complexity of the larval MBs and demonstrate unique aspects of neural generation and axonal sorting processes during the development of the complex brain centers in the fruit fly brain.