Two sesquiterpenes, 4-epi-microsphaeropsisin (1) and a dihydrofurano-2(1H)-naphthalenone (variabilone, 2) which represents a new skeleton, were isolated from endophytic fungus Paraconiothyrium variabile. Reactivity studies showed that eremophilane 1 is a precursor of 2 through acid-promoted methyl 1,2-migration and aromatization. An electrophilic intermediate of this transformation was intercepted by N-acetylcysteamine, a biomimetic nucleophile. Only compound 2 was antibacterial against endophytic bacterium Bacillus subtilis (coisolated with P. variabile), suggesting a role in the microbial competition in plants.