Esteya vermicola has shown promise as an efficient biological control agent against pine wilt disease, a devastating disease in pine forests caused by the pinewood nematode (PWN, Bursaphelenchus xylophilus). However, the in vivo interactions among E. vermicola, PWN, and pine hosts are less understood, both at the population and molecular levels. In this study, we performed a series of bioassays to investigate E. vermicola colonization patterns in pine xylem and its population responses to PWN invasion in healthy and PWN-induced wilting trees. Our results demonstrated that although E. vermicola exhibits slow growth, its conidia germinate and grew along the pine tracheid, even producing lunate conidia capable of initiating PWN infections within the xylem. Interestingly, while fungal hyphae became undetectable in pine sapling xylem after inoculation, the E. vermicola population increased immediately in response to PWN invasion. Furthermore, we observed a “leap-frog” dispersal pattern of fungal colonization in PWN-induced wilting pines, facilitated by the migration of fungal-infected nematodes. Moreover, we explored the molecular mechanisms underlying fungal tolerance to pine defense systems using transcriptomic analysis. Comparative transcriptomics revealed that carbohydrate metabolism and abiotic stress-induced oxidoreductive activities are involved in the fungal tolerance to the pine defense compound β-pinene. This study enhances our understanding of how E. vermicola colonizes and persists within pine xylem, its molecular responses to plant defense compounds, and its population dynamics upon PWN invasion, validating its efficacy as a biocontrol agent against pine wilt disease.