BACKGROUND: Group B Sox domain transcription factors play conserved roles in the specification and development of the nervous system in higher metazoans. However, we know comparatively little about how these transcription factors regulate gene expression, and the analysis of Sox gene function in vertebrates is confounded by functional compensation between three closely related family members. In Drosophila, only two group B Sox genes, Dichaete and SoxN, have been shown to function during embryonic CNS development, providing a simpler system for understanding the functions of this important class of regulators. RESULTS: Using a combination of transcriptional profiling and genome-wide binding analysis we conservatively identify over 1000 high confidence direct Dichaete target genes in the Drosophila genome. We show that Dichaete plays key roles in CNS development, regulating aspects of the temporal transcription factor sequence that confer neuroblast identity. Dichaete also shows a complex interaction with Prospero in the pathway controlling the switch from stem cell self-renewal to neural differentiation. Dichaete potentially regulates many more genes in the Drosophila genome and was found to be associated with over 2000 mapped regulatory elements. CONCLUSIONS: Our analysis suggests that Dichaete acts as a transcriptional hub, controlling multiple regulatory pathways during CNS development. These include a set of core CNS expressed genes that are also bound by the related Sox2 gene during mammalian CNS development. Furthermore, we identify Dichaete as one of the transcription factors involved in the neural stem cell transcriptional network, with evidence supporting the view that Dichaete is involved in controlling the temporal series of divisions regulating neuroblast identity.