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Silkworm pupae are a typical byproduct with high protein content from silk-reeling industry. The aim of this study was to evaluate the performance of defatted silkworm pupae hydrolysate as an alternative nitrogen source to produce polysaccharides and flavonoids using the fungus Phellinus baumii. The results indicated that the defatted silkworm pupa was treated with dispase, and the freeze-dried hydrolysate had a yield of 37% and a nitrogen content of 3.18%. In the fermentation process, the content of the hydrolysates was 32 g/L. Moreover, the consuming reducing sugar accounted for 75.61% of the total reducing sugar and the nitrogen consumption accounted for 35.19% of the total nitrogen content. The maximum biomass produced by the hydrolysate treatment group was 0.6 g/L, and the extracellular flavonoid concentration was 0.4 g/L; the produced extracellular polysaccharide concentration was 7.71 g/L, which was 1.4–5.9 times higher than that of other nitrogen source treatment groups. Therefore, the defatted silkworm pupae hydrolysate is an effective alternative nitrogen source which has great economic value. As a nitrogen source reagent, it enhanced the fermentation ability of P. baumiiand increased the yield of extracellular polysaccharides and flavonoids.