Recent sequencing projects have provided deep insight into fungal lifestyle-associated genomic adaptations. Here we report on the 25 Mb genome of the mutualistic root symbiont Piriformospora indica (Sebacinales, Basidiomycota) and provide a global characterization of fungal transcriptional responses associated with the colonization of living and dead barley roots. Extensive comparative analysis of the P. indica genome with other Basidiomycota and Ascomycota fungi that have diverse lifestyle strategies identified features typically associated with both, biotrophism and saprotrophism. The tightly controlled expression of the lifestyle-associated gene sets during the onset of the symbiosis, revealed by microarray analysis, argues for a biphasic root colonization strategy of P. indica. This is supported by a cytological study that shows an early biotrophic growth followed by a cell death-associated phase. About 10% of the fungal genes induced during the biotrophic colonization encoded putative small secreted proteins (SSP), including several lectin-like proteins and members of a P. indica-specific gene family (DELD) with a conserved novel seven-amino acids motif at the C-terminus. Similar to effectors found in other filamentous organisms, the occurrence of the DELDs correlated with the presence of transposable elements in gene-poor repeat-rich regions of the genome. This is the first in depth genomic study describing a mutualistic symbiont with a biphasic lifestyle. Our findings provide a significant advance in understanding development of biotrophic plant symbionts and suggest a series of incremental shifts along the continuum from saprotrophy towards biotrophy in the evolution of mycorrhizal association from decomposer fungi.