In the continual search by both pharmaceutical and agricultural industries for new products, natural selection has been found to be superior to combinatorial chemistry for discovering novel substances that have the potential to be developed into new industrial products. Since natural products are adapted to a specific function in nature, the search for novel secondary metabolites should concentrate on organisms that inhabit novel biotopes. Endophytic fungi inhabit such a biotope. In the course of the last 12 years, we have isolated ∼ 6500 endophytic fungi from herbaceous plants and trees, screened them for biological activities, and have isolated and determined the structures of the biologically active compounds. Correlations were found between biological activity and biotope, e.g. a higher proportion of the fungal endophytes, in contrast to the soil isolates, inhibited at least one of the test organisms for antialgal and herbicidal activities. The substances isolated originated from different biosynthetic pathways: isoprenoid, polyketide, amino acid derivatives, and belonged to diverse structural groups: terpenoids, steroids, xanthones, chinones, phenols, isocumarines, benzopyranones, tetralones, cytochalasines, and enniatines. The potential role of the endophyte and its biologically active metabolites in its association with its host has been investigated. The fungal endophytes possess the exoenzymes necessary to colonize their hosts and they grow well in the apoplastic washing fluid of the host. When the roots of larch are colonized, the association with the host may be mutualistic, improving growth of the host and supplying the mycobiont with enough nourishment to extensively colonize the host's roots. The concentrations of some plant defence metabolites are lower than in the control when the host is infected with a pathogen than with an endophyte. We hypothesize that the interaction fungal endophyte–plant host is characterized by a finely tuned equilibrium between fungal virulence and plant defence. If this balance is disturbed by either a decrease in plant defence or an increase in fungal virulence, disease develops. Not only must the endophyte synthesize metabolites to compete first with epiphytes and then with pathogens in order to colonize the host, but presumably also to regulate metabolism of the host in their delicately balanced association. The utilization of a biotope such as that of the fungal endophyte is one aspect of intelligent screening, another very important one is the taxonomy of the fungus in order to avoid redundant structural isolations. It is not a random walk through a random forest. Many groups of fungi in different biotopes are waiting to be exploited.