The Drosophila mushroom bodies, centers of olfactory learning and memory in the fly 'forebrain', develop from a set of neural stem cells (neuroblasts) that generate a large number of Kenyon cells (KCs) during sustained cell divisions from embryonic to late pupal stage. We show that retinal homeobox (rx), encoding for an evolutionarily conserved transcription factor, is required for proper development of the mushroom bodies. Throughout development rx is expressed in mushroom body neuroblasts (MBNBs), their ganglion mother cells (MB-GMCs) and young KCs. In the absence of rx function, MBNBs form correctly but exhibit a reduction in cell size and mitotic activity, whereas overexpression of rx increases growth of MBNBs. These data suggest that Rx is involved in the control of MBNB growth and proliferation. Rx also promotes cell cycling of MB-GMCs. Moreover, we show that Rx is important for the survival of MBNBs and Kenyon cells which undergo premature cell death in the absence of rx function. Simultaneous blocking of cell death restores the normal set of MBNBs and part of the KCs, demonstrating that both, impaired proliferation and premature cell death (of MBNBs and KCs) account for the observed defects in mushroom body development. We then show that Rx controls proliferation within the MBNB clones independently of Tailless (Tll) and Prospero (Pros), and does not regulate the expression of other key regulators of MB development, Eyeless (Ey) and Dachshund (Dac). Our data support that the role of Rx in forebrain development is conserved between vertebrates and fly.