Species in the ascomycete fungal genus Cordyceps have been proposed to be the teleomorphs of Metarhizium species. The latter have been widely used as insect biocontrol agents. Cordyceps species are highly prized for use in traditional Chinese medicines, but the genes responsible for biosynthesis of bioactive components, insect pathogenicity and the control of sexuality and fruiting have not been determined. Here, we report the genome sequence of the type species Cordyceps militaris. Phylogenomic analysis suggests that different species in the Cordyceps/Metarhizium genera have evolved into insect pathogens independently of each other, and that their similar large secretomes and gene family expansions are due to convergent evolution. However, relative to other fungi, including Metarhizium spp., many protein families are reduced in C. militaris, which suggests a more restricted ecology. Consistent with its long track record of safe usage as a medicine, the Cordyceps genome does not contain genes for known human mycotoxins. We establish that C. militaris is sexually heterothallic but, very unusually, fruiting can occur without an opposite mating-type partner. Transcriptional profiling indicates that fruiting involves induction of the Zn2Cys6-type transcription factors and MAPK pathway; unlike other fungi, however, the PKA pathway is not activated.