Cryptococcus neoformans is a pathogenic fungus which most commonly affects the central nervous system and causes fatal meningoencephalitis primarily in patients with AIDS. This fungus produces a thick extracellular polysaccharide capsule which is well recognized as a virulence factor. Here, we describe the isolation and characterization of a novel gene, CAP10, which is required for capsule formation. Complementation of the acapsular cap10 mutant produced an encapsulated strain and the deletion of CAP10 from a wild strain resulted in an acapsular phenotype. The molecular mass of the hemagglutinin epitope-tagged Cap10p is about 73 kDa, which is similar to the size predicted from sequence analysis. When CAP10 was fused with a hybrid green fluorescent protein construct, the fluorescence signals appeared as patches in the cytoplasm. Using a reporter gene construct, we found that CAP10 was expressed at high levels in late-stationary-phase cells. In addition, we found that the expression levels of CAP10 are modulated by the transcriptional factor STE12alpha. Deletion of STE12alpha downregulated the expression levels of CAP10 while overexpression of STE12alpha upregulated the expression levels of CAP10. Animal model studies indicate that deletion of the CAP10 gene results in the loss of virulence, and complementation of the acapsular phenotype of cap10 restores virulence. Thus, CAP10 is required for capsule formation and virulence.