Geosmithia morbida is an emerging fungal pathogen which serves as a paradigm for examining the evolutionary processes behind pathogenicity because it is one of two known pathogens within a genus of mostly saprophytic, beetle-associated, fungi. This pathogen causes thousand cankers disease in black walnut trees and is vectored into the host via the walnut twig beetle. G. morbida was first detected in western US and currently threatens the timber industry concentrated in eastern US. We sequenced the genomes of G. morbida and two non-pathogenic Geosmithia species and compared these species to other fungal pathogens and nonpathogens to identify genes under positive selection in G. morbida that may be associated with pathogenicity. G. morbida possesses one of the smallest genomes among the fungal species observed in this study, and one of the smallest fungal pathogen genomes to date. The enzymatic profile is this pathogen is very similar to its relatives. Our findings indicate that genome reduction is an important adaptation during the evolution of a specialized lifestyle in fungal species that occupy a specific niche, such as beetle vectored tree pathogens. We also present potential genes under selection in G. morbida that could be important for adaptation to a pathogenic lifestyle.