Paddy straw mushroom (Volvariella volvacea) is a world famous edible mushroom variety that has high demand due to its deliciousness and nutritive value. Although there is a big demand in Sri Lanka, there was no proper method of cultivation since it needs high temperature (33-35 ° C) and 85-90 % relative humidity in the growing environment. Therefore, an experiment was designed at Regional Agricultural Research and Development Centre, Department of Agriculture – Makandura during the year 2009 to develop an indoor (poly house) cultivation method that would maintain above environment requirements. The outdoor method was compared with an indoor method in RCBD. Paddy straw and cotton waste were used separately as main composting materials. The yield of indoor cultivation method of cotton waste and paddy straw were 5.38 kg/m 2 and 4.71 kg/m 2 respectively, while yields for the same parameters in outdoor cultivation method were 1.79 kg/m 2 and 1.73 kg/m 2 . There were significant yield differences between indoor and outdoor method in both composting materials. It is concluded that the indoor method can be successfully used to cultivate paddy straw mushroom profitably in Sri Lanka.