Stem cells have the remarkable ability to give rise to both self-renewing and differentiating daughter cells. Drosophila neural stem cells segregate cell-fate determinants from the self-renewing cell to the differentiating daughter at each division. Here, we show that one such determinant, the homeodomain transcription factor Prospero, regulates the choice between stem cell self-renewal and differentiation. We have identified the in vivo targets of Prospero throughout the entire genome. We show that Prospero represses genes required for self-renewal, such as stem cell fate genes and cell-cycle genes. Surprisingly, Prospero is also required to activate genes for terminal differentiation. We further show that in the absence of Prospero, differentiating daughters revert to a stem cell-like fate: they express markers of self-renewal, exhibit increased proliferation, and fail to differentiate. These results define a blueprint for the transition from stem cell self-renewal to terminal differentiation.