Endophytes, microorganisms that colonize internal tissues of all plant species, create a huge biodiversity with yet unknown novel natural products, presumed to push forward the frontiers of drug discovery. Next to the clinically acknowledged antineoplastic agent, paclitaxel, endophyte research has yielded potential drug lead compounds with antibacterial, antiviral, antioxidant, insulin mimetic, anti-neurodegenerative and immunosuppressant properties. Furthermore, while being implicated in livestock neurotoxicosis, some endophyte-produced alkaloids have been shown to display insecticidal activity. The endophyte-host relationship is postulated to be a 'balanced antagonism'. Moreover, the plausibility of horizontal gene transfer (HGT) hypothesis is taken into account. Knowledge of the genetic background of endophytic natural product biosynthesis is discussed on the basis of loline alkaloids, ergopeptines, lolitrems and maytansinoids. The current dynamic progress in genomics will contribute to a better understanding of endophytic microbes and to further exploiting them as a source of pharmaceutically relevant compounds.