The wood degrading fungus Schizophyllum commune is a model system for mushroom development. Here, we describe the 38.5 Mb assembled genome of this basidiomycete and application of whole genome expression analysis to study the 13,210 predicted genes. Comparative analyses of the S. commune genome revealed unique wood degrading machinery and mating type loci with the highest number of reported genes. Gene expression analyses revealed that one third of the 471 identified transcription factor genes were differentially expressed during sexual development. Two of these transcription factor genes were deleted. Inactivation of fst4 resulted in the inability to form mushrooms, whereas inactivation of fst3 resulted in more but smaller mushrooms than wild-type. These data illustrate that mechanisms underlying mushroom formation can be dissected using S. commune as a model. This will impact commercial production of mushrooms and the industrial use of these fruiting bodies to produce enzymes and pharmaceuticals