Pestalotiopsis microspora, isolate NE-32, is an endophyte of the Himalayan yew (Taxus wallichiana) that produces taxol, an important chemotherapeutic drug used in the treatment of breast and ovarian cancers. Conditions were determined to induce the perfect stage (teleomorph) of this organism in the laboratory as a critical first step to study inheritance of taxol biosynthetic genes. The perfect stage of Pestalotiopsis microspora NE-32 forms in a period of 3-6 weeks on water agarose with dried yew needles at 16-20 SC with 12 h of light per day. Morphological analysis of the teleomorph and sequencing of the 18S rDNA indicates that Pestalosphaeria hansenii is the perfect stage of Pestalotiopsis microspora. Only certain plants (e.g. yews, some pines, pecan, oat and some barley cultivars) allow the production of perithecia. Exhaustive methylene chloride extraction of yew (Taxus cuspidata) needles removes their capacity to induce production of perithecia. The methylene chloride extract is able to induce formation of perithecia by strain NE-32 in a bioassay system utilizing the sterilized sheaths of the Cholla cactus (Opuntia bigelovii) spine, indicating that a chemical compound(s) in yew stimulates the formation of the perfect stage. This hydrophobic plant compound(s) has been designated the perithecial-stimulating factor (PSF). The data suggest that plant products may play a role in regulating the biology of endophytic microbes.