The basic helix-loop-helix (bHLH) class of transcription factors have been linked to a variety of cellular differentiation processes, including myogenesis, neurogenesis and hematopoiesis. Here we report the cloning of a new member of this family of factors, capsulin. Capsulin was shown to be expressed as early as 9.5 days of mouse development, with expression in mesodermal cells that are progenitors of the epicardium and the coronary arteries. At later stages of development, expression is seen in mesenchymal cells that are closely associated with the epithelium of the developing lung, gut and kidney. In the proepicardial organ, and in the organs where it is expressed in later development, capsulin is expressed in cells that give will give rise to smooth muscle. Given the likely expression of capsulin in smooth muscle cell progenitors, and significant sequence similarity through the bHLH domain, capsulin may be a functional ortholog of a Drosophila gene that is expressed in cells that give rise to the longitudinal visceral muscle. Capsulin alone or in combination with other bHLH proteins, was shown to function as a transcription factor by its ability to transactivate both a synthetic and a native promoter, each of which contains multiple E-boxes. These studies extend the growing family of bHLH factors that are expressed in the early mesoderm, and suggest that capsulin may have a functional role in development of the coronary vasculature and organs containing epithelial lined tubular structures.