Two strains of the deuteromycete Paecilomyces inflatus were isolated from compost samples consisting of municipal wastes, paper and wood chips. Lignin degradation by P. inflatus was studied following the mineralization of a synthetic C-14(beta)-labeled lignin (sidechain labeled dehydrogenation polymer, DHP). Approximately 6.5% of the synthetic lignin was mineralized during solid-state cultivation of the fungus in autoclaved compost; and 15.5% was converted into water-soluble fragments. Laccase was the only ligninolytic enzyme detectable when the isolates were grown in autoclaved compost. Production of the enzyme was growth-associated and dependent on the culture conditions. The optimal pH for laccase production was between 4.5 and 5.5 and the optimal temperature was around 30 degreesC. Activity levels of laccase increased in the presence of low-molecular-mass aromatic compounds, such as veratryl alcohol, veratric acid, vanillin and vanillic acid.