Many invertebrates reproduce asexually by budding, but morphogenesis and the role of cell proliferation in this diverse and nonconserved regeneration-like process are generally poorly understood and particularly little investigated in didemnid ascidians. We here analyzed cell proliferation patterns and telomerase activity during budding in the colonial didemnid ascidian Diplosoma listerianum, with special focus on the thoracic bud where a new brain develops de novo. To help define developmental stages of the thoracic bud, the distribution of acetylated tubulin was also examined. We found extensive cell proliferation in both the thoracic and abdominal buds of D. listerianum as well as higher telomerase activity in bud tissue compared to adult tissues. In the parent adult, proliferation was found in various tissues, but was especially intense in the adult esophagus and epicardial structures that protrude into the proliferating and developing buds, confirming these tissues as the primary source of the cells that form the buds. The neural complex in the thoracic bud forms from a hollow tube that appears to separate into the neural gland and the cerebral ganglion. Whereas most of the bud undergoes proliferation, including the hollow tube and the neural gland, the cerebral ganglion shows little or no proliferation. Pulse-chase labeling experiments indicate that the ganglion, as well as the myocardium, in adult zooids are instead composed of postmitotic cells.