SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

For the quarterly period ended     October 31, 1998
                              -------------------------

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

For the transition from                      to
                       ----------------------  --------------------

                         Commission file number 0-16158

                           TreeSource Industries, Inc.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

            Oregon                                          93-0832150
-------------------------------                  -------------------------------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                         Identification No.)

          10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
--------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code)    (503) 246-3440
                                                    ----------------------

                              WTD Industries, Inc.
--------------------------------------------------------------------------------
            (Former Name, Former Address and Former Fiscal Year, if
                           Changed Since Last Report)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
                                             ---  ---

     The number of shares  outstanding  of  Registrant's  Common  Stock,  no par
value, at November 30, 1998 was 11,162,874.


<PAGE>
                           TREESOURCE INDUSTRIES, INC.
                           ---------------------------

                                      INDEX

                                                                           Page
                                                                          Number
                                                                          ------
PART I.       Financial Information (Unaudited)


     Item 1.    Financial Statements

          Consolidated Statements of Operations -
            Three Months and Six Months Ended October 31, 1998 and 1997       3


          Consolidated Balance Sheets -
             October 31, 1998 and April 30, 1998                              4


          Consolidated Statements of Cash Flows -
                 Six Months Ended October 31, 1998 and 1997                   6


          Notes to Consolidated Financial Statements                          7

     Item 2.    Management's Discussion and Analysis
                of Financial Condition and Results of
                Operations                                                   11


PART II.  Other Information

     Item 1.   Legal Proceedings                                             15

     Item 2.   Changes in Securities and Use of Proceeds                     15

     Item 4.   Submission of Matters to a Vote of Security Holders           15

     Item 5.   Other Information                                             16

     Item 6.   Exhibits and Reports on Form 8-K                              16






                                       2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per-Share Amounts)
                                   (Unaudited)
 
 
                                            THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                OCTOBER 31,                          OCTOBER 31,
                                        ---------------------------          ---------------------------
                                            1998            1997                 1998            1997
                                        -----------     -----------          -----------     -----------
<S>                                     <C>             <C>                  <C>             <C>       
NET SALES                               $   51,240      $   67,387           $   98,901      $  136,268
 
COST OF SALES                               47,859          63,854               92,034         125,695
                                        -----------     -----------          -----------     ----------- 
GROSS PROFIT                                 3,381           3,533                6,867          10,573
 
SELLING, GENERAL AND
     ADMINISTRATIVE EXPENSES                 2,628           2,903                5,392           6,133
                                        -----------     -----------          -----------     ----------- 
OPERATING INCOME                               753             630                1,475           4,440
 
OTHER INCOME (EXPENSE)
     Interest Expense                       (1,158)         (1,182)              (2,318)         (2,393)
     Miscellaneous                              81              35                 (100)            136
                                        -----------     -----------          -----------     ----------- 
                                            (1,077)         (1,147)              (2,418)         (2,257)
                                       -----------     -----------          -----------     ----------- 
 
INCOME (LOSS) BEFORE INCOME TAXES             (324)           (517)                (943)          2,183
 
PROVISION  FOR INCOME TAXES (BENEFIT)           --            (319)                  --             437
                                        -----------     -----------          -----------     ----------- 
NET INCOME (LOSS)                             (324)           (198)                (943)          1,746
 
PREFERRED DIVIDENDS                            574             573                1,148           1,142
                                        -----------     -----------          -----------     ----------- 
NET INCOME (LOSS) APPLICABLE
  TO COMMON STOCKHOLDERS                $     (898)     $     (771)          $   (2,091)     $      604
                                        ===========     ===========          ===========     =========== 
 
NET INCOME (LOSS) PER COMMON SHARE
     BASIC                                  ($0.08)         ($0.07)              ($0.19)          $0.05
                                            -------         -------              -------          -----  
     DILUTED                                ($0.08)         ($0.07)              ($0.19)          $0.05
                                            -------         -------              -------          -----  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
  
 
 
 
 
                                        3
<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                                 (In Thousands)
 
                                                   OCTOBER 31,        APRIL 30,
                                                      1998               1998
                                                   ---------          ---------
CURRENT ASSETS                                      (Unaudited)
   Cash and cash equivalents                       $  3,734           $  2,157
   Accounts receivable, net                           8,482             10,464
   Inventories                                       13,310             14,005
   Prepaid expenses                                   1,624              1,195
   Income tax refund receivable                         119                 --
   Deferred tax asset                                   750                750
   Assets held for sale                               5,959              6,685
   Timber, timberlands and timber-related assets      2,544              4,252
                                                   ---------          --------- 
      Total current assets                           36,522             39,508
 
 
NOTES AND ACCOUNTS RECEIVABLE                            45                103
 
PROPERTY, PLANT AND EQUIPMENT, at cost
   Land                                               2,848              2,849
   Buildings and improvements                        10,614             11,123
   Machinery and equipment                           62,530             62,623
                                                   ---------          --------- 
                                                     75,992             76,595
 
     Less accumulated depreciation                   52,843             52,378
                                                   ---------          --------- 
                                                     23,149             24,217
 
   Construction in progress                             633                225
                                                   ---------          --------- 
                                                     23,782             24,442
 
OTHER ASSETS                                          1,291              1,258
                                                   ---------          --------- 
 
                                                   $ 61,640           $ 65,311
                                                   =========          ========= 
 
 
 
 
 
 
 
 
 
 
 
 
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
 
 
 
 
 
                                        4
 
<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEETS
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                    (In Thousands, Except Share Information)
 
 
 
                                                   OCTOBER 31,        APRIL 30,
                                                      1998               1998
                                                   ---------          ---------
CURRENT LIABILITIES                               (Unaudited)
   Accounts payable                                $  7,769           $  8,992
   Accrued expenses                                   7,051              6,568
   Timber contracts payable                             346                323
   Current maturities of long-term debt               9,684              8,467
                                                   ---------          ---------
      Total current liabilities                      24,850             24,350
 
LONG-TERM DEBT, less current maturities              34,779             36,868
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS' EQUITY
   Preferred stock, 10,000,000 shares authorized
     Series A, 270,079 shares outstanding            20,688             20,688
     Series B, 6,111 shares outstanding                 333                333
   Common stock, no par value, 40,000,000 shares
     authorized, 11,162,874 issued and outstanding
     (11,154,374 at April 30, 1998)                  28,761             28,752
   Additional paid-in capital                            15                 15
   Retained deficit                                 (47,786)           (45,695)
                                                   ---------          --------- 
                                                      2,011              4,093
                                                   ---------          ---------
 
                                                   $ 61,640           $ 65,311
                                                   =========          ========= 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
 
 
 
 
 
                                        5
<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)
                                   (Unaudited)
 
<TABLE>
<CAPTION>
 
                                                            SIX MONTHS ENDED OCTOBER 31,
                                                              1998                 1997
                                                           ---------             --------- 
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S>                                                        <C>                   <C>     
  Net income (loss)                                        $   (943)             $  1,746
  Adjustments to reconcile net income (loss) to
     cash provided by operating activities:
    Depreciation, depletion and amortization                  2,156                 2,968
    Deferred income tax                                          --                   192
    Accounts receivable                                       1,982                 4,436
    Inventories                                                 695                (2,466)
    Prepaid expenses                                           (429)                 (462)
    Timber, timberlands and timber-related assets - current   1,708                  (611)
    Payables and accruals                                      (688)               (1,840)
    Income taxes                                               (119)                   --
                                                           ---------             ---------  
     Cash provided by operating activities                    4,362                 3,963
 
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
  Acquisition of property, plant and equipment               (1,153)               (6,152)
  Net book value of retirements                                 260                     1
  Net book value of disposed idle assets                        177                    --
  Other investing activities                                     58                     9
                                                           ---------             ---------  
     Cash used for investing activities                        (658)               (6,142)
                                                           ---------             ---------   
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
  Principal payments on long-term debt                         (901)               (2,228)
  Other assets                                                  (87)                  (49)
  Dividends paid on preferred stock                          (1,148)               (1,148)
  Issuance of common stock                                        9                   105
                                                           ---------             ---------   
     Cash used for financing activities                      (2,127)               (3,320)
                                                           ---------             ---------   
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              1,577                (5,499)
CASH BALANCE AT BEGINNING OF PERIOD                           2,157                 8,209
                                                           ---------             ---------   
CASH BALANCE AT END OF PERIOD                              $  3,734              $  2,710
                                                           =========             =========   
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
  Interest                                                   $2,056                $2,351
  Income taxes                                                  ($2)                 $244
 
 
</TABLE>
 
 
 
 
 
 
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
 
 
 
 
 
                                        6
<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PRESENTATION

     In the opinion of  management,  the  consolidated  financial  statements of
TreeSource  Industries,  Inc. and  subsidiaries  ("TreeSource" or "the Company")
presented herein include all adjustments, which are solely of a normal recurring
nature, necessary for a fair presentation of the financial position,  results of
operations  and  cash  flows  for  the  interim   periods   presented.   Certain
reclassifications may have been made to the prior period results and balances to
conform to the current period  classifications.  The financial statements should
be read with  reference to  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations" contained in this report, and the "Notes to
Consolidated  Financial  Statements" set forth in the Company's Annual Report on
Form 10-K for the year  ended  April 30,  1998,  filed with the  Securities  and
Exchange  Commission.  The results of operations for the current interim periods
are not  necessarily  indicative  of the results to be expected  for the current
year.

NOTE 2 - INVENTORIES

     Inventories are valued at the lower of cost or market. The amounts included
in  inventories  at  October  31,  1998 and April 30,  1998 are as  follows  (in
thousands):

                                            October 31,            April 30,
                                               1998                  1998    
                                           -------------         -------------
       Logs                                $       5,237         $       3,791
       Lumber                                      6,629                 8,635
       Supplies and other                          1,444                 1,579
                                           -------------         -------------

                                           $      13,310         $      14,005
                                           =============         =============

NOTE 3 - LONG-TERM DEBT

     The Company's primary debt agreement includes certain covenants,  including
the maintenance of specified levels of adjusted cumulative  operating income (as
defined),  tangible net worth, working capital, collateral coverage (as defined)
and total  liabilities  ratio (as defined).  This agreement also imposes certain
restrictions  and  limitations on capital  expenditures,  investments,  dividend
payments,   new  indebtedness,   and  transactions  with  officers,   directors,
shareholders and affiliates. This debt agreement was most recently amended as of
April 1,  1998,  with  respect  to  certain  affirmative  financial  performance
covenants.




                                       7
<PAGE>
NOTE 3 - LONG-TERM DEBT (Continued)

     At October  31, 1998 the  Company's  tangible  net worth was $1.9  million,
compared to a minimum of negative $1.0 million required by the covenant. At that
same date, the Company's  working  capital was $11.7  million,  compared to $9.0
million  required by the  covenant.  Also,  at October 31, 1998,  the  Company's
adjusted  cumulative  operating  income  was $36.7  million,  compared  to $30.0
million required.  The collateral  coverage ratio at October 31, 1998 was 62.5%,
compared to a 50% minimum required level. The total  liabilities ratio was 96.7%
at October 31, 1998, compared to a maximum allowed of 100%. The minimum level of
tangible net worth  increases to $0 at January 1, 1999,  $2.0 million at July 1,
1999,  and $4.0 million at July 1, 2000.  The minimum  level of working  capital
increases to $11.5  million at July 1, 1999,  $14.0  million at July 1, 2000 and
$16.5  million  at July 1,  2002.  The  minimum  level  of  adjusted  cumulative
operating  income  increases to $34.0 million at November 1, 1998, $37.5 million
at July 1, 1999,  $42.5  million at July 1, 2000,  and $47.5  million at July 1,
2001. The minimum required collateral coverage ratio increases to 63% at July 1,
1999. The maximum allowed total  liabilities  ratio drops to 95% at July 1, 1999
and 85% at July 1,  2000.  During  the  quarter  ended  October  31,  1998,  the
Company's adjusted  cumulative  operating income increased by $1.0 million while
the quarter showed a loss before taxes of $0.3 million. The Company continues to
be in compliance with all covenants  contained in the debt  agreement,  although
operating  conditions must improve from current levels for the Company to remain
in compliance with this agreement.

     The  debt  agreement  requires  prepayments  if  the  Company's  cumulative
operating  income exceeds  certain  specified  amounts.  No such  prepayment was
required for the year ended April 30, 1998. In  connection  with the May 1, 1996
amendment,  the  Company  agreed to  additional  prepayments  computed at 30% of
quarterly  net income.  No such  prepayment  is required  for the quarter  ended
October 31, 1998.

NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING

     Stockholders' equity at October 31, 1998 consists of the following:

         Series A  preferred  stock,  $100  per  share  liquidation  preference;
         500,000  shares  authorized;  270,079  shares  issued and  outstanding;
         limited  voting  rights;  cumulative  dividends  payable  quarterly  in
         advance at the prime rate, with a minimum rate of 6% and a maximum rate
         of 9%; convertible into common stock at $7.50 per share after April 30,
         1999;  redeemable at original issue price plus accrued dividends at the
         option of the Board of  Directors,  in the form of cash or in  exchange
         for senior unsecured debt with a 12% coupon.  The holders of the Series
         A preferred stock will be granted voting control of the Company's Board
         of  Directors  in  the  event  the  Company  misses  three  consecutive
         quarterly  dividend  payments,  four quarterly dividend payments within
         twenty-four months or a total of eight quarterly dividend payments. The
         Company has not missed any dividend  payments on the Series A preferred
         stock.

         Series B  preferred  stock,  $100  per  share  liquidation  preference;
         500,000 shares authorized; 6,111 shares issued and outstanding; limited
         voting  rights;  convertible  into  212,693  shares  of  common  stock;
         dividends   payable  only  if  paid  on  the  Company's  common  stock;
         redeemable


                                       8

<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
              (Continued)

         at original  issue price plus  accrued  dividends  at the option of the
         Board  of  Directors  after  all  Series  A  preferred  stock  has been
         redeemed.

         Series  C  junior   participating   preferred  stock,  $100  per  share
         liquidation preference;  400,000 shares authorized; no shares issued or
         outstanding;  each share has 100 votes,  voting  together  with  Common
         Stock;  dividends payable only if paid on the Company's Common Stock at
         100 times the Common Stock dividend rate. This class of preferred stock
         was authorized in connection with the  shareholder  rights plan adopted
         by the Company on March 4, 1998.

         Common stock, no par value;  40,000,000 shares  authorized;  11,162,874
         shares issued and outstanding.  Before giving effect to any shares that
         might be  issued  pursuant  to the  exercise  of any stock  options  or
         conversion of any Series A preferred  stock, the total number of common
         shares  would  increase  to  11,375,567  shares if  remaining  Series B
         preferred stock  outstanding at October 31, 1998 is converted to common
         stock.

NOTE 5 - NET INCOME (LOSS) PER SHARE

    The  calculations  of net income  (loss) per share for the  three-month  and
six-month  periods  ended  October  31, 1998 and 1997 are  summarized  below (in
thousands, except per-share data):
<TABLE>
<CAPTION>
                                               Three Months Ended          Six Months Ended
                                                   October 31,                October 31, 
                                             ---------------------      ---------------------
                                                1998        1997           1998        1997 
                                             ---------   ---------      ---------   ---------
<S>                                          <C>         <C>            <C>         <C>
NET INCOME (LOSS) APPLICABLE TO
   COMMON SHAREHOLDERS                       $   (898)   $   (771)      $ (2,091)   $    604 
                                             =========   =========      =========   =========


WEIGHTED AVERAGE SHARES OUTSTANDING
  -BASIC                                       11,163      11,129         11,159      11,130

ADDITIONAL SHARES ASSUMED FROM:
  Conversion of Series B
   preferred stock                                --          --             --          213

  Exercise of stock options                       --          --             --          450 
                                             ---------   ---------      ---------   ---------

AVERAGE NUMBER OF SHARES AND
  EQUIVALENTS OUTSTANDING
   - DILUTED                                   11,163      11,129         11,159      11,793 
                                             =========   =========      =========   =========


NET INCOME (LOSS) PER COMMON SHARE
   - BASIC                                     ($0.08)     ($0.07)        ($0.19)      $0.05
                                               =======     =======        =======     =======

   - DILUTED                                   ($0.08)     ($0.07)        ($0.19)      $0.05
                                               =======     =======        =======     =======
</TABLE>

    Earnings  (loss) per share have been recomputed and restated for the effects
of implementing Statement of Financial Accounting Standard Number 128, "Earnings
per Share," as of December 31, 1997.

                                       9
<PAGE>
NOTE 6 - INCOME TAXES

     The income tax  provision is based on the  estimated  effective  annual tax
rate for each fiscal year.  The provision  includes  anticipated  current income
taxes payable,  the tax effect of anticipated  differences between the financial
reporting and tax basis of assets and liabilities,  and the expected utilization
of net operating loss (NOL) carryforwards.

     The  federal  and state  income tax  provision  (benefit)  consists  of the
following (in thousands):
<TABLE>
<CAPTION>
                                              Three Months Ended          Six Months Ended
                                                   October 31,                October 31,
                                             ---------------------      ---------------------    
                                                1998        1997           1998        1997   
                                             ---------   ---------      ---------   ---------
<S>                                          <C>         <C>            <C>         <C>     
      Income (loss) before income taxes      $   (324)   $   (517)      $   (943)   $  2,183
                                             =========   =========      =========   =========
                                             
      Income tax provision:
         Federal                             $     --    $   (298)      $     --    $    350
         State                                     --         (21)            --          87
                                             ---------   ---------      ---------   ---------

                                             $     --    $   (319)      $     --    $    437
                                             =========   =========      =========   =========

         Current                             $     --    $    182       $     --    $    245
         Deferred                                  --        (501)            --         192
                                             ---------   ---------      ---------   ---------
                                             $     --    $   (319)      $     --    $    437
                                             =========   =========      =========   =========
</TABLE>

    The Company's remaining adjusted NOL at April 30, 1998 was approximately $22
million for federal  income tax and $20 million for state  income tax  purposes.
These carryforwards  expire in 2007 and 2012. Because of the difficult operating
environment  and the  likely  delayed  or  decreased  use of the  Company's  NOL
carryforwards,  the Company has  provided  for a valuation  reserve  against any
benefits created from the current period operating loss. Management periodically
reviews the above  factors and may change the amount of  valuation  allowance as
facts and circumstances dictate.

     In the quarter and six months ended  October 31, 1998,  the Company did not
record any tax provision or benefit.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

     The  Company is  involved in various  litigation  primarily  arising in the
normal course of its business. Additionally, the Company has received notices in
connection with potential environmental litigation. See "Legal Proceedings."

     The  Company is subject to  various  federal,  state and local  regulations
regarding waste disposal and pollution control.  Various  regulations  regarding
air and water emissions,  log yard  management,  and disposal or landfill of log
yard debris may require  material  expenditures in the future.  The expenditures
required for the Company to comply with any such regulations may have a material
adverse impact on the Company's  consolidated  financial condition or results of
operations.

                                       10
<PAGE>
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Results of Operations
---------------------

     On a quarter-to-quarter  basis, the Company's financial results have varied
widely,  and will  continue  to vary,  due to seasonal  fluctuations  and market
factors  affecting  the demand for logs,  lumber  and other wood  products.  The
industry is subject to fluctuations in sales and earnings due to such factors as
industry  production  in relation to product  demand and  variations in interest
rates and  housing  starts.  Currency  fluctuations  affect  the  industry  when
exchange  rates spur log exports and drive up  domestic  log prices,  and when a
relatively   strong  U.S.  dollar   encourages  lumber  imports  from  competing
countries.  Trade  policies and  agreements  between the United States and other
countries,  such as Canada, can also significantly  affect log and lumber prices
in the Company's markets.

      The industry is also affected by weather  conditions  and changing  timber
management  policies.   Fire  danger  and  excessively  dry  or  wet  conditions
temporarily  reduce  logging  activity and may increase  open market log prices.
Timber  management  policies of governmental  agencies change from time to time,
causing actual or feared  shortages in some areas  periodically.  These policies
change because of  environmental  concerns,  public agency budget issues,  and a
variety of other reasons.  Therefore, past results for any given year or quarter
are not necessarily indicative of future results.

       It  is  generally  the  Company's   practice  to  curtail  production  at
facilities  from time to time due to  conditions  which  temporarily  impair log
flow, or when imbalances  between log costs and product prices cause the cost of
operation for some period of time to exceed the cost of shutdown and  restarting
the facility.

      Raw  materials  comprise the majority of the cost of products  sold by the
Company.  The Company  depends  principally on open market log purchases for its
raw materials needs.

      Fiscal year 1999 started off with weak lumber prices.  Prices strengthened
through  the end of the  first  quarter  and into the early  part of the  second
quarter,  whereupon  they  reversed  direction and went down through most of the
second  quarter.  The Company has been unable to reduce its log costs  enough to
maintain  profitable  operations for the quarter or six months ended October 31,
1998. The Company has added hours of production at certain locations to optimize
results of these operations. The margins recently experienced by the Company may
not  continue or improve,  and may even decline  further.  During much of fiscal
year 1998 and  through  the first six months of fiscal  year 1999,  there was an
oversupply of lumber in the U.S. market.  This oversupply  principally  resulted
from North American  producers  redistributing  to the U.S. market a substantial
portion of their  historic level of shipments to offshore  markets.  Chip prices
are up  substantially  from a year ago,  while lumber  prices and log costs have
declined.



                                       11
<PAGE>
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS (Continued)

     The following table sets forth the percentages  which certain  expenses and
income items bear to net sales, and the  period-to-period  percentage  change in
each item:
<TABLE>
<CAPTION>
                                              Income and Expense Items as                        Percentage 
                                               a Percentage of Net Sales                     Increase (Decrease)
                                      ------------------------------------------      ---------------------------------

                                                                                                                        
                                      Three Months Ended       Six Months Ended         Three Months       Six Months
                                          October 31,             October 31,              Ended              Ended
                                      ------------------      ------------------         10/31/98           10/31/98
                                                                                            to                 to
                                        1998       1997         1998       1997          10/31/97           10/31/97
                                      -------    -------      -------    -------      --------------     --------------
<S>                                    <C>        <C>          <C>       <C>              <C>                <C>   
Net sales                              100.0 %    100.0 %      100.0 $    100.0 %         (24.0) %           (27.4)
Cost of sales                           93.4       94.8         93.1       92.2           (25.0)             (26.8)
                                      -------    -------      -------    -------     
Gross profit                             6.6        5.2          6.9        7.8            (4.3)             (35.1)

Selling, general and
  administrative expense                 5.1        4.3          5.5        4.5            (9.5)             (12.1)
                                      -------    -------      -------    -------

Operating income                         1.5        0.9          1.5        3.3            19.5              (66.8)


Interest expense                        (2.3)      (1.8)        (2.3)      (1.8)           (2.0)              (3.1)
Miscellaneous                            0.2        0.1         (0.1)       0.1           131.4                 NM
                                      -------    -------      -------    -------

Income (loss) before income taxes       (0.6)      (0.8)        (1.0)       1.6           (37.3)                NM

Provision for income taxes (benefit)     0.0       (0.5)         0.0        0.3              NM                 NM
                                      -------    -------      -------    -------

Net income (loss)                       (0.6) %    (0.3) %      (1.0) %     1.3 %          63.6                 NM
                                      =======    =======      =======    =======
</TABLE>

Note:  Percentages may not add precisely due to rounding.
NM:  Not Meaningful

Comparison of Three Months Ended October 31, 1998 and 1997
----------------------------------------------------------

    Net sales for the three  months  ended  October  31,  1998  decreased  $16.1
million (24%) from the three months ended October 31, 1997. This was principally
caused by a 16% decrease in lumber shipments, a 13% decrease in chip deliveries,
and a 15% decrease in lumber prices;  partially offset by a 35% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain  products in the current quarter  compared to a stronger
market  during  much of the second  quarter of fiscal  1998.  The  reduced  chip
deliveries  reflect not only reduced lumber  production but also improved lumber
recovery  resulting  in fewer chips per  thousand  board feet  ("mbf") of lumber
produced.

    Gross profit for the quarter  ended  October 31, 1998 was 6.6% of net sales,
compared to 5.2% of net sales for the quarter  ended  October 31,  1997.  Lumber
prices  declined  by 15% from the  second  quarter  of  fiscal  1998,  while the
Company's log costs also declined by 15%. Unit manufacturing  costs decreased by
8% from  the  quarter  ended  October  31,  1997,  principally  reflecting  more
efficient  production  levels at  several  locations  and the  curtailment  of a
facility with relatively higher production costs.



                                       12
<PAGE>
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS (Continued)
 
    Selling,  general  and  administrative  expenses in the three  months  ended
October 31, 1998  decreased  by $0.3  million  (9%) from the three  months ended
October 31, 1997. This decrease  reflects the results of  cost-cutting  measures
taken by the  Company  and the  operation  of  fewer  facilities  in the  recent
quarter.

    In the  quarter  ended  October 31,  1998,  the Company did not record a tax
provision  or  benefit.  In the quarter  ended  October  31,  1997,  the Company
recorded  a tax  benefit  equal  to 62%  of  its  pre-tax  loss.  See  Note 6 to
Consolidated Financial Statements.

Comparison of  Six Months Ended October 31, 1998 and 1997
---------------------------------------------------------

     Net sales for the six months ended October 31, 1998 decreased $37.4 million
(27%) from the six months ended October 31, 1997. This was principally caused by
a 16% decrease in lumber shipments,  an 18% decrease in chip deliveries,  and an
18%  decrease  in lumber  prices;  partially  offset by a 42%  increase  in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain  products  during the most recent  period  compared to a
stronger  market in the first half of fiscal 1998.  The reduced chip  deliveries
reflect not only reduced  lumber  production but also improved  lumber  recovery
resulting in fewer chips per mbf.

     Gross  profit for the six months  ended  October  31,  1998 was 6.9% of net
sales,  compared to 7.8% of net sales for the six months ended October 31, 1997.
Lumber prices declined by 18% from the six months ended October 31, 1997,  while
the Company's log costs declined by 17%.  Production declined compared to levels
in the prior year, when production  levels reflected the more favorable  market.
Unit  manufacturing  costs decreased by 2% from the six months ended October 31,
1997,  principally  reflecting  more  efficient  production  levels  at  several
facilities.

     Selling,  general  and  administrative  expenses  in the six  months  ended
October 31,  1998  decreased  by $0.7  million  (12%) from the six months  ended
October 31, 1997. This decrease  reflects the results of  cost-cutting  measures
taken by the Company and the  operation of fewer  facilities  in the more recent
period.

     In the six months ended October 31, 1998,  the Company did not record a tax
provision  or benefit.  In the six months ended  October 31,  1997,  the Company
recorded  a tax  provision  equal  to 20% of its  pretax  profit.  See Note 6 to
Consolidated Financial Statements.

Liquidity and Capital Resources
-------------------------------

     The Company  relies on cash provided by its  operations to fund its working
capital  needs.  Such cash may not be sufficient  to fund the  Company's  future
operations.  Substantially  all of the Company's  assets are pledged as security
for its primary debt obligation.

     At October 31, 1998, the Company had net working  capital of $11.7 million,
$3.5  million  less than at April 30,  1998.  The working  capital  decrease was
primarily the result of operating losses,  capital spending,  principal payments
on debt, and dividends paid on the Company's Series A preferred stock.

                                       13
<PAGE>
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS (Continued)
 
     During the six months ended October 31, 1998,  the Company's  cash and cash
equivalents   increased   by  $1.6  million  to  $3.7  million  at  October  31.
Approximately  $4.4  million  of cash was  provided  by  operations.  About $0.9
million was used to repay various debt obligations and $1.2 million was used for
capital expenditures. The Company also paid $1.1 million in dividends to holders
of its Series A preferred stock.

     Capital  spending in the first six months of fiscal 1999 was $1.2  million.
Capital spending for the balance of the fiscal year is currently  forecast to be
approximately $0.6 million.  The Company had no material commitments for capital
spending at October 31, 1998.

     The Company's  Credit and Security  Agreement dated as of November 30, 1992
contains certain  covenants,  including the maintenance of prescribed  levels of
collateral coverage (as defined),  tangible net worth, working capital, adjusted
cumulative  operating  income  (as  defined)  and  total  liabilities  ratio (as
defined).  This debt  agreement was most  recently  amended as of April 1, 1998,
with respect to certain affirmative financial performance covenants. The Company
continues to be in compliance  with all covenants  contained in this  agreement,
although  operating  conditions must improve from current levels for the Company
to  remain  in  compliance  with  this  agreement.  See  Note 3 to  Consolidated
Financial Statements.

Forward - Looking Information
-----------------------------

     Certain statements in this Form 10-Q contain "forward-looking"  information
(as  defined in Section 27A of the  Securities  Act of 1933,  as  amended)  that
involve risks and  uncertainties,  including,  but not limited to, the impact of
foreign and domestic economic  conditions,  increased interest rates, the impact
of  competitive  products and pricing,  availability  and cost of raw materials,
inadequate  cash  reserves  or  liquidity,  changes in  environmental  and other
regulations,  additional  expenditures  necessary  to comply with  environmental
regulations (see "Legal  Proceedings"),  changes in the Company's ability to use
its net operating  loss  carryforward  and the risk factors  listed from time to
time in the Company's SEC reports,  including, but not limited to, the report on
Form  10-K  for  the  fiscal  year  ended  April  30,  1998  (Part  II,  Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations").















                                       14
<PAGE>
                           TREESOURCE INDUSTRIES, INC.

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

     The Company's  South Bend  facility has received a Notice of  Noncompliance
with  effluent  permit  terms from the  Washington  Department  of Ecology.  The
Company has  received a Notice of Intent to sue under the Clean Water Act from a
citizen's group based on the Notice of Noncompliance.

     The Company has made  modifications to the plant's boiler system to address
the alleged noncompliance and settlement discussions are continuing.

Item 2.  Changes in Securities and Use of Proceeds

         (c)      Recent Sales of Unregistered Securities

     On  November  3, 1998,  the  Company  granted  to Jess R. Drake  options to
purchase  543,295  shares of the Company's  Common Stock at an exercise price of
$.7969 per share,  subject to certain vesting and other conditions,  pursuant to
the terms of that certain Employment Contract between Mr. Drake and the Company.
In  issuing  these  securities,  the  Company  relied  upon  an  exemption  from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Item 4.  Submission of Matters to a Vote of Security Holders

     On October 26, 1998, the Company held its Annual  Meeting of  Shareholders,
at which  directors  Richard W.  Detweiler and William H. Wright were elected to
three-year  terms.  The number of votes cast for each nominated  Director was as
follows:

                                                         Against or
                                  For                     Withheld 
                              -----------               -----------
     Detweiler                 9,251,624                   463,331
     Wright                    9,251,104                   463,851


     A proposal to amend the Company's  Stock Option Plan to increase the number
of  shares  reserved  for  issuance  under the plan was  approved.  The vote was
4,902,799 for, 710,912 against, and 83,987 abstentions.

     A proposal to amend the Company's  Articles of  Incorporation to change the
Company name to TreeSource Industries, Inc. was approved. The vote was 6,037,255
for, 3,634,880 against, and 42,820 abstentions.

     The appointment of Moss Adams LLP as the Company's independent auditors was
ratified.   The  vote  was  6,114,966  for,  290,799   against,   and  3,309,190
abstentions.




                                       15

<PAGE>
Item 5.  Other Information

     On October 31, 1998, the Company  entered into an Employment  Contract with
Jess R. Drake,  pursuant to which Mr.  Drake  became,  on November 4, 1998,  the
Company's  President  and Chief  Executive  Officer,  and was  elected to fill a
vacancy on the Company's Board of Directors.  Mr. Drake will serve out two years
remaining  on a  three-year  term,  subject  to the  approval  of the  Company's
shareholders  at the 1999  annual  meeting.  On  November  3, 1998,  the Company
entered into a Stock Option Letter  Agreement with Mr. Drake,  pursuant to which
the  Company  awarded Mr.  Drake  options to  purchase  the Common  Stock of the
Company, subject to vesting and other conditions.

Item 6.  Exhibits and Reports on Form 8-K

         (a)  Exhibits

                  The Index to Exhibits is located on page 18.

         (b)  Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
                  October 31, 1998.



















  
                                     16
<PAGE>
                                   SIGNATURES
                                   ----------

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





                                                  TREESOURCE INDUSTRIES, INC.
                                                  ------------------------------
                                                  (Registrant)



                                             By:  /s/ Jess R. Drake
                                                  ------------------------------
                                                  Jess R. Drake
                                                  President


                                             By:  /s/ K. Stanley Martin        
                                                  ------------------------------
                                                  K. Stanley Martin
                                                  Vice President-Finance







         December 15, 1998















                                       17
<PAGE>
                           TREESOURCE INDUSTRIES, INC.

                                INDEX TO EXHIBITS
                                                                      Sequential
                                                                          Number
                                                                          System
                                                                            Page
                                                                          Number

3.1    Fourth Restated Articles of Incorporation of Registrant adopted
        effective November 27, 1992, as amended                               19
  
3.2    Second Restated Bylaws of the Registrant adopted effective
        November 27, 1992(1)

10.11  Employment Contract dated October 31, 1998, between
        Jess R. Drake and Registrant(2)                                       38

10.12  Stock Option Letter Agreement dated November 3, 1998, between
        Jess R. Drake and Registrant(2)                                       46

19     Other reports furnished to securities holders with respect to the
        quarter ended October 31, 1998:  Management's letter excerpted from
        Interim Report to Shareholders for the second quarter of fiscal 1999  55

27     Financial Data Schedule(3)

--------------------------------------------------------------------------------

     (1)Incorporated  by  reference  to  the  exhibit  of  like  number  to  the
Registrant's  annual  report on Form  10-K for the year  ended  April 30,  1993,
previously filed with the Commission.

     (2)Management contract or compensatory plan or arrangement.

     (3)This  schedule has been submitted in the electronic  form  prescribed by
EDGAR.

--------------------------------------------------------------------------------

     All other  required  Exhibits are listed in the Company's  Annual Report on
Form 10-K for the year ended April 30, 1998.







                                       18