Fruiting colonies of Phellinus contiguus growing on an agar medium and explants from competent regions of dark-grown colonies were used to investigate differentiation of setae, which are a component of the hymenium. The majority of setae arose laterally from intercalary hyphal compartments. The first sign of seta differentiation was generalized swelling of a portion of the hyphal compartment. On explants 50% of the seta population reached the ensuing rounded tip, pointed tip and brown point stages 36, 52 and 68 h post-excision respectively. The distribution of setae on cut surfaces of explants after incubation for three days was in general similar to that of the much larger total hyphal population. However hyphae close to the source outer surface and on explants from older parts of source colonies had reduced capacity for seta differentiation. The spatial density of setae after three days was increased by addition of glucose to the explantation medium and reduced by addition of ammonium chloride. It is concluded that many of the hyphae near to cut surfaces of explants are competent to form setae and that the number which do so is limited by environment, possibly energy supply.