Chamaecyparis obtusa (Hinoki cypress) has been extensively studied for its leaves and bark, which are known to contain high levels of polyphenols and flavonoids with potent bioactivities. In this study, the phytochemical transformation and changes in bioactivity of C. obtusa leaves were investigated through bioconversion using the mycelium of Phellinus linteus. Initially, extracts of C. obtusa leaves were prepared using distilled water (COD) and 99% ethanol (COE), and the bioconverted extract, CPE-1. The extracts were evaluated for antioxidant potential (DPPH and ABTS radical scavenging), cytotoxicity, antibacterial efficacy, and anti-inflammatory activity in LPS-stimulated RAW 264.7 macrophages. The results indicated that CPE-1 exhibited the highest overall efficacy among the tested extracts, showing antioxidant activity comparable to that of BHT and ascorbic acid, while presenting relatively lower antimicrobial effects against Staphylococcus aureus and Bacillus spp. However, in an in vitro cellular model, CPE-1 significantly enhanced anti-inflammatory effects, including notable inhibition of nitric oxide (NO) production, suppression of COX-2 and iNOS expression, and inhibition of ERK and JNK phosphorylation. Its antioxidant activity remained strong, exhibiting radical scavenging capabilities comparable to those of synthetic controls (BHT and ascorbic acid). HPLC analysis confirmed that bioconversion successfully modified the phytochemical profile of C. obtusa, yielding metabolites with enhanced potency while preserving stable, beneficial compounds like gallic acid. These findings collectively establish fungal biotransformation as an effective technology for upgrading plant-derived extracts into potent, multifunctional bioactive materials suitable for therapeutic or functional food applications.