The free-living flatworm, Macrostomum lignano has an impressive regenerative capacity. Following injury, it can regenerate almost an entirely new organism because of the presence of an abundant somatic stem cell population, the neoblasts. This set of unique properties makes many flatworms attractive organisms for studying the evolution of pathways involved in tissue self-renewal, cell-fate specification, and regeneration. The use of these organisms as models, however, is hampered by the lack of a well-assembled and annotated genome sequences, fundamental to modern genetic and molecular studies. Here we report the genomic sequence of M. lignano and an accompanying characterization of its transcriptome. The genome structure of M. lignano is remarkably complex, with ∼75% of its sequence being comprised of simple repeats and transposon sequences. This has made high-quality assembly from Illumina reads alone impossible (N50=222 bp). We therefore generated 130× coverage by long sequencing reads from the Pacific Biosciences platform to create a substantially improved assembly with an N50 of 64 Kbp. We complemented the reference genome with an assembled and annotated transcriptome, and used both of these datasets in combination to probe gene-expression patterns during regeneration, examining pathways important to stem cell function.