To improve the nematode-infected pinewood application value, an effective strategy was developed based on the cultivation of Flammulina velutipes to process the pinewood that was infected by the nematode Bursaphelenchus xylophilus. Different treatments were compared to determine the optimal method to obtain the highest yields of reducing sugars. The results showed that the cultivation of F. velutipes using the nematode-infected pine sawdust overcame the disadvantage of cultivation by using healthy pine sawdust, and whether fungal infection that happened in the period of pine wilt disease or during the cultivation of F. velutipes both can contribute on the degradation of the polysaccharide content. A high yield of reducing sugars can be obtained using 2% dilute sulfuric acid at 121 °C for 1 h to treat recyclable nematode-infected pine sawdust after the cultivation of F. velutipes. Additionally, the results showed that fungal infection that occurred in the period of the pine wilt disease and during the cultivation of F. velutipes in addition to acid hydrolysis effectively converted hemicellulose to reducing sugars.