In coffee-producing countries, waste products from coffee production are useful substrates for cultivation of Pleurotus ostreatus. This species is relatively easy to grow, coffee waste substrates are readily available and the mushroom fruiting bodies are a valuable source of nutrition and income. In developed countries, cultivation of P. ostreatus on spent coffee grounds (SCG) from coffee consumption is a novel way to recycle this urban waste product. Here, we studied the effect of SCG and caffeine on growth of a commercial strain of P. ostreatus in liquid and solid cultures, and on a commercial scale. The presence of caffeine inhibited mycelial growth on agar and in liquid culture in the laboratory. Increased levels of SCG in an SCG/sawdust substrate also delayed mycelial growth and delayed or prevented fruiting during commercial cultivation. Despite growth inhibition, partial degradation of caffeine to xanthine by P. ostreatus mycelium was observed in all SCG-containing substrate mixtures. Degradation of caffeine proceeded mainly via sequential N-demethylation to theophylline (1,3-dimethylxanthine) and 3-methylxanthine, although both paraxanthine and theobromine also accumulated in the substrate. Caffeine and its demethylated metabolites were also detected in fruiting bodies, but it was not clear whether caffeine metabolism occurred in the fruiting bodies themselves or whether caffeine metabolites were translocated there from the mycelium. Based on the caffeine concentrations measured in fruiting bodies after growth with SCG, it would be necessary to consume 250kg of fresh oyster mushrooms to obtain the amount of caffeine equivalent to one cup of espresso coffee, suggesting that the health impact of caffeine in these mushrooms is low. However, the ability of P. ostreatus to degrade caffeine indicates that this and other species in this genus may have potential applications in detoxification of coffee production wastes.