Two well-preserved mud mounds, approximately 50 m thick, in the Mount Hawk Formation (Upper Devonian, Frasnian) in western Alberta provide an unparalleled opportunity to study the microstructure of this reef type in detail for this time interval. This reveals that they are composed dominantly of peloidal sediments—more than a quarter of mud mound volume—along with dense micrite, particulate micrite, bioclasts, and stromatactis cavities. Five types of peloids are differentiated: bacterial, cyanobacterial, bioclastic, intraclastic, and pseudo-peloids. Bacterial peloids were generated by bacterial metabolic activities with possibly some contribution from organomineralization in areas within spicular networks. Three subtypes of cyanobacterial peloids are distinguished based on whether they are physically reworked calcified filaments, aggregates of calcified coccoids, or precipitated within stromatolite-forming cyanobacterial mats or biofilms. Bioclastic peloids are fully micritized fragments of skeletons and shells. Intraclastic peloids are eroded fragments of early-lithified matrix. Pseudo-peloids represent artifacts of poorly preserved sponge spicular networks reflecting the interplay between dissolution of spicules and organomineralization. The distribution of the various peloid types shows specificity in different microfacies. They prove to be valuable paleoecological indicators, and taken together suggest that the mud mounds accreted within the photic zone above storm wave base but below the fair-weather wave base, during deposition of a transgressive and perhaps highstand systems tracts. They are the products reflecting a dynamic balance between constructional versus destructive processes. Bacterial peloids combined with dense micrite constitute the framework, which in turn makes up close to 40% of the mud mounds. This indicates that microbial activities are responsible for the early-indurated framework. The onset of bacterial peloid formation in the bedded sediment immediately underlying the mud mounds further demonstrates that it may have been a necessary precursor to mud-mound initiation. Bacterial peloids appear to characterize most Paleozoic and Mesozoic reefal mud mounds as an essential framework element.