Morphological characteristics of hyphal interaction between Grifola umbellata (Pers. Ex Fr.) Pilat and its companion fungus which related to sclerotia formation from hyphae were investigated by external observations, light microscopy and transmission electron microscopy (TEM). External observations showed that a dense antagonism line was formed by both G. umbellata and companion fungus after their hyphae contacted each other in dual culture. Many hyphal strands emerged on the colony of G. umbellata and differentiated to sclerotia from where hyphal strands crossed. Light microscope observations revealed the process of antagonism line formation. Mature antagonism with structural differentiation, was composed of three main layers: the rind, the rind underlayer and the hypha layer. TEM observations showed that after colonies hyphal contact, a series of reactions always occurred in both G. umbellata and companion fungus. Cells in the center of antagonism line were dead. Cells of G. umbellata adjacent to the antagonism line were usually large and hollow, with unilateral thickened wall, whereas those of companion fungus were empty, with thin or thick wall. Both hyphal interaction at the antagonism line may be one of the main reasons for sclerotia of G. umbellata differentiation from hypha.