Vertebrate Dlx genes have been implicated in the differentiation of multiple neuronal subtypes, including cortical GABAergic interneurons, and mutations in Dlx genes have been linked to clinical conditions such as epilepsy and autism. Here we show that the single Drosophila Dlx homolog, distal-less, is required both to specify chemosensory neurons and to regulate the morphologies of their axons and dendrites. We establish that distal-less is necessary for development of the mushroom body, a brain region that processes olfactory information. These are important examples of distal-less function in an invertebrate nervous system and demonstrate that the Drosophila larval olfactory system is a powerful model in which to understand distal-less functions during neurogenesis.