Produced by and purified from Taxus brevifolia, Taxol (paclitaxel) has become a widely used cancer drug in clinic. Due to the rapid growing market, current industrial production of taxol by semi-synthesis that consumes large amount of Taxus trees cannot meet the requirement of the market. The discovery of taxol-producing fungus Taxomyces andeanae, an endophyte of T. brevifolia, by Stierle et al (1993), paves a new way to the production of the drug, i.e. employing large-scale fungal fermentation to make Taxol at lower cost and yet higher yield. This review discusses the present problems in taxol production in pharmaceutical industry, the finding and research progress on taxol-producing fungi, and the potential application of fungal fermentation to manufacture this important drug.