Conifer needles, like many grasses, are infected by systemic fungal endophytes. Following suggestions made in the early 1980s that (1) conifer needle endophytes may produce anti-insectan compounds, and (2) population dynamics of the eastern spruce budworm in New Brunswick could not be completely explained based on existing knowledge, we discovered that a low percentage of needle endophytes made a range of known and new metabolites toxic to this insect. Here, we report that wound inoculations of toxigenic endophytes of seedlings from a breeding population of white spruce were successful across a range of genotypes. The needles colonized by a rugulosin-producing endophyte were found to contain rugulosin in concentrations that are effective in vitro at retarding the growth of spruce budworm larvae. Larvae presented with endophyte infected needles containing rugulosin do not gain as much weight as those eating uncolonized needles. This represents the first positive evidence that the kind of mutualism between toxigenic endophytes and grasses affecting insect herbivory also may occur in white spruce.