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Brown-rot fungi break down hemicellulose and cellulose that form the wood structure. Cellulose is broken down by hydrogen peroxide (H₂O₂) that is produced during the breakdown of hemicellulose. Because hydrogen peroxide is a small molecule, it can diffuse rapidly through the wood, leading to a decay that is not confined to the direct surroundings of the fungal hyphae. As a result of this type of decay, the wood shrinks, shows a brown discoloration, and cracks into roughly cubical pieces, a phenomenon termed cubical fracture. The fungi of certain types remove cellulose compounds from wood and hence the wood becomes a brown color.

Brown rot in a dry, crumbly condition is sometimes incorrectly referred to as dry rot in general. The term brown rot replaced the general use of the term dry rot, as wood must be damp to decay, although it may become dry later. Dry rot is a generic name for certain species of brown-rot fungi.

The actively conducting portion of the stem in which tree cells are still alive and metabolically active is referred to as sapwood.

In the living tree, sapwood is responsible not only for conduction of sap but also for storage and synthesis of biochemicals. An important storage function is the long-term storage of photosynthate. Carbon that must be expended to form a new flush of leaves or needles must be stored somewhere in the tree, and parenchyma cells of the sapwood are often where this material is stored. The primary storage forms of photosynthate are starch and lipids. Starch grains are stored in the parenchyma cells and can be easily seen with a microscope.

Heartwood functions in long-term storage of biochemicals of many varieties depending on the species. These chemicals are known collectively as extractives. In the past, heartwood was thought to be a disposal site for harmful byproducts of cellular metabolism, the so-called secondary metabolites. This led to the concept of the heartwood as a dumping ground for chemicals that, to a greater or lesser degree, would harm living cells if not sequestered in a safe place. We now know that extractives are a normal part of the plant’s system of protecting its wood.

Extractives are responsible for imparting several larger-scale characteristics to wood. For example, extractives provide natural durability to timbers that have a resistance to decay fungi. In the case of a wood like teak (Tectona grandis), known for its stability and water resistance, these properties are conferred in large part by the waxes and oils formed and deposited in the heartwood. Many woods valued for their colors, such as mahogany (Swietenia mahagoni), African blackwood (Diospyros melanoxylon), and Brazilian rosewood (Dalbergia nigra),owe their value to the type and quantity of extractives in the heartwood.

For these species, the sapwood has little or no value, because the desirable properties are imparted by heartwood extractives.

White-rot fungi break down the lignin in wood, leaving the lighter-colored cellulose behind; some of them break down both lignin and cellulose. As a result, the wood changes texture, becoming moist, soft, spongy, or stringy; its color becomes white or yellow. Because white-rot fungi are able to produce enzymes, such as laccase, needed to break down lignin and other complex organic molecules, they have been investigated for use in mycoremediation applications.

There are many different enzymes that are involved in the decay of wood by white-rot fungi, some of which directly oxidize lignin. White-rot fungi are grown all over the world as a source of food – for example the shiitake mushroom, which in 2003 comprised approximately 25% of total mushroom production.