TREESOURCE INDUSTRIES, INC.

United States Securities and Exchange Commission, Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended                   Commission file number
April 30, 1999                              0-16158

TREESOURCE INDUSTRIES, INC., formerly WTD Industries, Inc.
(Exact name of registrant as specified in its charter)

Oregon                                      93-0832150
(State of Incorporation)                    (I.R.S. Employer Identification No.)

10260 S.W. Greenburg Road, Suite 900        Registrant's telephone number,
Portland, Oregon 97223                      including area code: (503) 246-3440
(Address of principal executive offices)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)


     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     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  twelve  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[ ]

     State the aggregate market value of the common stock held by non-affiliates
of the registrant, as of July 6, 1999: $4,534,359.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes  of  Common  Stock,  as of July 6, 1999:  Common  Stock,  no par  value:
11,162,874.


<PAGE>
                           FORM 10-K TABLE OF CONTENTS
Item No.                                                               Page No.


PART I                                                                     3

Item 1.        BUSINESS                                                    3

Item 2.        PROPERTIES                                                  7

Item 3.        LEGAL PROCEEDINGS                                           8

Item 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         8


PART II                                                                    9

Item 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS                                         9

Item 6.        SELECTED FINANCIAL DATA                                    10

Item 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS                        11

Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                19

Item 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE                        19


PART III                                                                  20

Item 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT         20

Item 11.       EXECUTIVE COMPENSATION                                     23

Item 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT                                                 31

Item 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS             32


PART IV                                                                   33

Item 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
               ON FORM 8-K                                                33
      (a) (1)     Financial Statements                                    33
      (a) (2)     Financial Statement Schedules                           33
      (a) (3)     Exhibit Index                                           33
      (b)         Reports on Form 8-K                                     39

<PAGE>
                                     PART I

Item 1.   BUSINESS

     TreeSource  Industries,  Inc. is a corporation organized in Oregon in 1983,
which, through its subsidiaries,  manufactures  softwood and hardwood lumber and
by-products.  TreeSource  Industries,  Inc. and its subsidiaries are hereinafter
referred to as  "TreeSource"  or the  "Company".  The  Company  changed its name
effective October 27, 1998 from WTD Industries,  Inc. to TreeSource  Industries,
Inc. The Company markets its products primarily in the United States and Canada.

Products and Markets
--------------------

     Softwood Lumber
     ---------------

     The  Company   manufactures   a  variety  of  softwood   lumber   products,
predominantly  from Douglas fir,  hemlock,  and white fir. The Company  produces
softwood studs in several species,  generally as 2x4 or 2x6 lumber in lengths of
8 to 10 feet. The Company also makes  dimension  softwood lumber in a wide range
of  widths  and  thicknesses  in  lengths  from 6 to 26  feet.  Softwood  lumber
accounted  for 87% of net sales in fiscal 1999,  and 89% of net sales in each of
fiscal 1998 and fiscal 1997.

     The Company sells softwood lumber to a large number of customers, primarily
distribution  centers and wholesalers and directly to large retailers.  Softwood
lumber  is  used  in  a  variety  of  applications,  including  residential  and
commercial construction, packaging, and industrial uses.

     Other Products
     --------------

     The Company  produces a small quantity of hardwood lumber in sizes targeted
principally for the furniture and cabinet  industries.  Wood chips, a by-product
of  the  manufacturing   process,   are  sold  principally  to  pulp  and  paper
manufacturers. Wood chips and other by-products accounted for 8% of net sales in
fiscal 1999, 7% of net sales in fiscal 1998, and 6% of net sales in fiscal 1997.
Beginning in fiscal 1998, the Company produced a small quantity of fingerjointed
products.  The Company  discontinued  operation of its  fingerjointing  plant in
fiscal 1999, and that facility is for sale.  Fingerjointed product accounted for
less than 1% of net sales in fiscal 1999.

     The Company is licensed to use, and to grant licenses for others to use, in
North America and Mexico, a patented technology called GREENWELD(R) that enables
the gluing of green or  unseasoned  lumber.  The Company  used the  GREENWELD(R)
process in its fingerjointing  operation during fiscal 1999. During fiscal 1999,
the Company  generated  income from its licensing  activity which  accounted for
less than 1% of net sales.  The Company's rights to grant licenses for others to
use GREENWELD(R) are for sale.


<PAGE>
Distribution and Marketing
--------------------------

     The Company  markets,  distributes,  and  arranges  transportation  for its
lumber products through its wholly owned subsidiary and sales agent, TreeSource,
Inc.  Through  its  centralized  sales  function,  the Company  coordinates  the
production  capabilities  of individual  mills to meet a broad range of customer
needs.  TreeSource sells primarily through telephone contacts from its office in
Portland, Oregon.

     Shipments of wood  products are  generally  made by rail or truck  directly
from the mill.  Exports do not represent a material portion of the Company's net
sales.

     The  Company  does not  attempt to  accumulate  a large  backlog of orders.
TreeSource's  general  practice is to maintain an order file  ranging from about
one to four weeks' production. The filling of orders for certain items, however,
may  require a  substantially  longer  period of time.  The dollar  value of the
Company's  backlog  of orders at both  April 30,  1999 and 1998 was $8  million.
Backlog on any  particular  date may not be indicative of the Company's  average
backlog, net sales, or the backlog for any succeeding period.

     No single customer  accounted for as much as 10% of the Company's net sales
during  fiscal  1999.  The loss of any one customer  would not, in  management's
opinion,  have a material  adverse  impact on the Company  and its  subsidiaries
taken as a whole.

Timber Supply
-------------

     The  Company  has  historically  purchased  timber  and logs in  sufficient
quantities to match only the current  operating  requirements of its mills.  The
Company plans to increase the quantity of purchased  timber and logs,  generally
held in inventory or on contract.  The Company has revised its  procurement  and
inventory  strategy  to allow it to maintain  timber and log  supplies to assure
reasonably uninterrupted mill production during periods of inclement weather and
changes in local log market  conditions.  The goal of the  strategy  is to allow
mills to increase  their hours of operation,  more  effectively  manage both the
price and quality of log purchases during periods of tight supply,  and maintain
more stable operating costs.

         Timber and logs  comprise the majority of the cost of products  sold by
the Company.  The Company  relies  mainly on open market log purchases to supply
its raw material  needs.  It also purchases  timber-cutting  contracts  ("timber
contracts")  and has  historically  obtained logs to a minor extent from its own
fee  timberlands.  At April 30,  1999,  the Company  owned a small amount of fee
timberlands  in the vicinity of various  mills.  The  following  table shows the
percentages of logs supplied by open market  purchases,  public timber contracts
and fee timberlands, and total log footage required:


<PAGE>
      Year Ended     Open       Timber         Fee         Log
       April 30,    Market     Contracts     Timber    Requirements
      -------------------------------------------------------------
           1995      95%          5%           --      317,100 MBF
           1996      94%          5%           1%      228,162 MBF
           1997      94%          5%           1%      320,507 MBF
           1998      94%          6%           --      284,300 MBF
           1999      94%          5%           1%      233,501 MBF

MBF - Thousand Board Feet

     During  fiscal years 1995 through  1999,  the Company  operated most of its
mills on a one-shift  basis,  typically  using logs purchased on the open market
from industrial and  non-industrial  private land owners.  In the latter half of
fiscal 1999,  two mills were moved to a two-shift  operating  basis,  increasing
their  annual log  consumption.  The  ability to maintain  the present  level of
operations  at the Company's  mills depends on a continuing  supply of logs from
these private sources.

     The availability and cost of timber and logs have been, and should continue
to be,  influenced by a variety of factors,  including demand by competitors and
exporters, the environmental and harvest policies of federal and state agencies,
and,  in the long term,  the  acreage of  commercial  timber  land.  For further
discussion of current  industry  conditions  relating to timber supply,  see the
section titled "Factors Affecting  Forward-Looking  Statements - Availability of
Logs".

Employees
---------

     The Company and its subsidiaries had approximately 900 employees at July 6,
1999. During fiscal 1999, the local  woodworkers union that briefly  represented
workers at the Company's  South Bend facility  before the union was  decertified
and  abandoned  its  request  for  a  new  election.   See  "Factors   Affecting
Forward-Looking Statements-Manufacturing Risks". The Company uses bonus programs
to motivate its employees. See Note 9 to Consolidated Financial Statements.

Environmental Regulation
------------------------

     The  Company is subject to  federal,  state,  and local  pollution  control
regulations,  including those regulating air, water,  and noise pollution,  that
have  required,  and are expected to continue to require,  operating and capital
expenditures.   During  fiscal  1999,  the  Company  incurred   expenditures  of
approximately $556,000 for environmental  protection measures.  Expenditures are
projected  to be  approximately  $1,058,000  for each of  fiscal  2000 and 2001,
including  costs  to  remediate  the  site  at  Sedro-Woolley,   Washington,  in
preparation  for sale.  Additional  expenditures  will be necessary to remediate
other sites in  preparation  for sale.  Such amounts cannot be estimated at this
time and may be material.  Various regulations regarding air and water emissions
and disposal or landfill of log yard debris may require material expenditures in
the future. See "Factors Affecting Forward-Looking  Statements-Federal and State
Regulations".




<PAGE>
Industry Conditions
-------------------

     The United States lumber  industry is highly  sensitive to the condition of
the nation's  economy and tends to  experience  poor  financial  results  during
general economic downturns.  Although sales traditionally increase in the spring
and summer  months and decline  during the fall and winter months in response to
seasonal  building  construction  cycles,  such seasonal  patterns are sometimes
absent.  During fiscal 1998, the advent of the Asian financial crisis negatively
impacted  the  industry  and the  Company.  Demand  for  lumber  exports to Asia
decreased significantly.  Manufacturers in North America that had been producing
for the export lumber  market  converted  production to supply the U.S.  market,
which caused an oversupply of lumber.  The  resulting  oversupply  placed strong
downward pressure on lumber prices for most of fiscal 1998,  despite  reasonable
interest rates and strong construction activity in the United States.

     During fiscal 1999,  the lumber market  continued to be poor despite strong
domestic  demand  for  lumber.  The  lumber  market hit a low point in the third
quarter  of  fiscal  1999 and then  began  slowly  improving.  Continued  strong
domestic construction activity spurred by low interest rates, combined with mill
closures  allowed the lumber market to improve  throughout the fourth quarter of
fiscal 1999.

     During  fiscal  1999  the  Company  took  an  impairment   charge  totaling
$6,310,000 to reflect the  Company's  estimate of the fair value of assets being
held for sale.  The  facilities  currently  held for sale are Burke  Lumber Co.,
Midway   Engineering,   Pacific  Softwoods,   Philomath  Forest  Products,   and
Sedro-Woolley Lumber Co. See Note 3 to Consolidated Financial Statements.

     Wood chip demand and prices are determined by conditions in the global pulp
and paper industry and generally are not affected by seasonal  business  cycles.
During fiscal 1998,  reduced demand for pulp and paper products  caused pulp and
paper production  curtailments  and kept chip prices low.  Weakness in wood chip
prices  continued  into fiscal  1999.  See  "Factors  Affecting  Forward-Looking
Statements" for further discussion.

Competition
-----------

     The wood  products  industry  is highly  competitive  and  includes a large
number  of  companies   manufacturing   relatively  standardized  products.  The
principal  means of  competition  in the lumber  industry  are log  costs,  unit
production costs, pricing,  product quality, and the ability to satisfy customer
needs promptly.  The Company  believes it can compete  effectively  based on the
foregoing  factors.  Some of  TreeSource's  competitors  are  large,  integrated
companies that have significantly  greater  financial,  production and marketing
resources than the Company. Some of these competitors have a significant base of
low-cost  fee  timberlands  and  timber  contracts,  which  protects  them  from
fluctuations  in log  prices  and  gives  them a  potential  advantage  over the
Company,  which  relies on the open log  market  to  supply  the bulk of its raw
materials requirements.


<PAGE>
     The Company's  competition includes lumber manufacturers  located in Canada
that  benefit  from  advantageous  exchange  rates and, in some areas,  low-cost
government owned timber when exporting lumber to the United States.  As a result
of U.S.  government-initiated  trade talks, Canada agreed that starting April 1,
1996,  for a period of five years,  and subject to specific  exceptions,  lumber
exporters in certain provinces will pay export taxes if  pre-established  levels
of exports to the U.S. are exceeded. The goal of the trade agreement is to limit
the volume of lumber  exported  to the U.S. by  Canadian  producers.  This trade
agreement has not fully achieved the desired effect.  However, to date, Canadian
lumber  producers  have  paid   significant   export  taxes  for  exceeding  the
pre-established levels of exports.

     See the sections  titled,  "Timber  Supply",  "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results of  Operations",  and  "Factors
Affecting Forward-Looking Statements".


Item 2.   PROPERTIES

MANUFACTURING FACILITIES(1)                               Thousand Board Feet
                                                        ------------------------
                                                          Fiscal    Est. Annual
                                                           1999      Production
Softwood Lumber                                         Production   Capacity(2)
------------------------------------------------------  ----------  ------------
Burke Lumber Co., West Burke, Vermont(3)(4)                19,000      50,000
Central Point Lumber Co., Central Point, Oregon            60,000     120,000
Glide Lumber Products Co., Glide, Oregon                  114,000     135,000
Morton Forest Products Co., Morton, Washington             74,000      93,000
North Powder Lumber Co., North Powder, Oregon              52,000     100,000
Pacific Softwoods Co., Philomath, Oregon(5)                19,000         ---
Philomath Forest Products Co., Philomath, Oregon(5)           ---         ---
Sedro-Woolley Lumber Co., Sedro-Woolley, Washington(5)(6)     ---         ---
Spanaway Lumber Co., Spanaway, Washington(7)               64,000      95,000
Trask River Lumber Co., Tillamook, Oregon(7)               60,000     137,000
Tumwater Lumber Co., Tumwater, Washington(7)               65,000     107,000

Hardwood Lumber
------------------------------------------------------
Pacific Hardwoods-South Bend Co.,
   South Bend, Washington(7)(3)                            17,000      24,000

Fingerjointed Lumber
------------------------------------------------------
Midway Engineered Wood Products, Inc.,
   Corvallis, Oregon(5)(6)(7)                                 ---         ---

(1)  The  machinery  and  equipment  of all  facilities  are  subject to the
     security interests of certain lenders.
(2)  Capacity is generally computed using a two-shift-per-day, five day-per-week
     operating  schedule.
(3)  Capacity is calculated on a one-shift basis.
(4)  Facility is currently operating and is for sale.
(5)  This facility is not operating and is for sale.
(6)  These subsidiaries lease a substantial portion of their equipment pursuant
     to operating leases.
(7)  These subsidiaries lease the real property on which the mill is located
     pursuant to ground leases.



<PAGE>
Item 3.   LEGAL PROCEEDINGS

     On or about January 30, 1991, TreeSource  Industries,  Inc. and each of its
subsidiaries filed a voluntary  petition for reorganization  under Chapter 11 of
the Federal  Bankruptcy  Code.  The  proceeding  was filed in the United  States
Bankruptcy  Court  for the  Western  District  of  Washington  in  Seattle  (the
"Bankruptcy  Court").  The jointly  administered  proceeding  is titled:  "In re
Sedro-Woolley Lumber Co., WTD Industries,  Inc., TreeSource, Inc., et al.", Case
Numbers 91-00707 through 91-00721,  91-00736 through 91-00741,  91-00752 through
91-00756,   91-00773  through  91-00778,  and  91-01140  through  91-01149.  The
Company's  Second  Amended  Joint Plan of  Reorganization  was  confirmed by the
Bankruptcy Court on November 23, 1992,  effective November 30, 1992. During 1996
and 1997,  orders were entered in the  Bankruptcy  Court  closing the Chapter 11
cases of WTD Industries, Inc. and all its subsidiaries.

     The  Company has settled all  pending  allegations  of  noncompliance  with
certain air and water  discharge  limitations  against the Company's South Bend,
Washington  facility.  On April 14, 1999, the Company  entered into a settlement
agreement with respect to the allegation of  noncompliance  with water discharge
limitations  pursuant to which the Company agreed to make minor  improvements in
its  boiler  area,  to pay  attorneys'  fees,  and to make a  contribution  of a
nonmaterial  amount.  On June 15, 1999,  the Company  resolved the allegation of
noncompliance with limitations on air discharges by paying a $2,000 fine.

     The Company and its Trask River subsidiary were named defendants in a claim
for wages and penalties filed in U.S.  District Court for the District of Oregon
on February 17, 1999,  (Allen,  Blount,  et al., v. WTD Industries,  Inc., Trask
River  Lumber  Company,  Inc.,  and Bruce L.  Engel).  The  Company  has  denied
liability. The parties are engaged in preliminary settlement discussions.


Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.



<PAGE>
                                     PART II


Item 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

Principal Market
----------------

     Effective  January 7, 1999, the Company's Common Stock is quoted on the OTC
Bulletin Board, under the symbol TRES. Before that date, the Company's stock was
quoted on the  Nasdaq  National  Market  System  under the same  symbol  (before
October 27,  1998,  under the symbol  WTDI).  The number of holders of record of
TreeSource  Industries,  Inc.  Common Stock at July 6, 1999 was 578. The Company
estimates  that the total number of its direct and  beneficial  shareholders  is
approximately 4,100.

Stock Price and Dividend Information
------------------------------------

     The following tables show the range of reported high and low bid quotations
for the two years ended April 30, 1999:

     Fiscal Year Ended
       April 30, 1999            Low                High
     -----------------        ----------         ----------
     First Quarter              $.7500            $1.5630
     Second Quarter             $.5000            $1.0000
     Third Quarter*             $.3125            $1.0940
     Fourth Quarter*            $.3125            $0.7187

     Fiscal Year Ended
       April 30, 1998            Low                High
     -----------------        ----------         ----------
      First Quarter             $1-7/8            $4-3/16
      Second Quarter            $2-1/8            $4-1/8
      Third Quarter             $1-17/32          $2-3/4
      Fourth Quarter            $1-3/8            $2

* Effective January 7, 1999, quotes are as reported on the OTC Bulletin Board.

     The high and low bid quotations shown are those reported on Nasdaq,  except
where noted.  They reflect  inter-dealer  prices, do not include retail markups,
markdowns,   or   commissions,   and  may  not  necessarily   represent   actual
transactions.  Prior to the Company's October 1986 public stock offering,  there
was no public trading market for its Common Stock.

     TreeSource  does  not pay any  cash  dividends  on its  Common  Stock.  The
Company's various debt instruments restrict the payment of dividends.  See Notes
6 and 8 to Consolidated Financial Statements.





<PAGE>
Item 6.   SELECTED FINANCIAL DATA
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts and Ratios)
<TABLE>

                                                                                YEAR ENDED APRIL 30,
                                                        ----------------------------------------------------------------------
                                                           1999           1998           1997           1996           1995
                                                        ----------     ----------     ----------     ----------     ----------
<S>                                                      <C>            <C>            <C>            <C>            <C>
NET SALES                                                $195,012       $242,051       $284,086       $191,964       $274,966
COST OF SALES                                             184,015        231,303        255,068        186,514        262,334
                                                        ----------     ----------     ----------     ----------     ----------
GROSS PROFIT                                               10,997         10,748         29,018          5,450         12,632

GENERAL, SELLING AND
  ADMINISTRATIVE EXPENSES                                  10,738         11,290         12,529          9,685         10,366
IMPAIRMENT CHARGES AND REORGANIZATION CREDIT                6,310          4,168              -           (409)          (532)
                                                        ----------     ----------     ----------     ----------     ----------
OPERATING INCOME (LOSS)                                    (6,051)        (4,710)        16,489         (3,826)         2,798

INTEREST EXPENSE                                           (4,732)        (4,682)        (5,029)        (5,318)        (5,972)
OTHER INCOME (EXPENSE)                                        441           (394)           630            646          1,228
                                                        ----------     ----------     ----------     ----------     ----------
INCOME (LOSS) BEFORE INCOME TAXES                         (10,342)        (9,786)        12,090         (8,498)        (1,946)

PROVISION FOR INCOME TAXES (BENEFIT)                          (96)         2,364          3,120         (2,454)        (5,646)
                                                        ----------     ----------     ----------     ----------     ----------
NET INCOME (LOSS)                                         (10,246)       (12,150)         8,970         (6,044)         3,700
PREFERRED DIVIDENDS                                         1,671          2,290          2,228          2,364          2,126
                                                        ----------     ----------     ----------     ----------     ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS                                             ($11,917)      ($14,440)        $6,742        ($8,408)        $1,574
                                                        ==========     ==========     ==========     ==========     ==========
NET INCOME (LOSS) PER COMMON SHARE, BASIC
- net income (loss)                                        ($1.07)        ($1.30)         $0.61         ($0.76)         $0.14
  Average shares outstanding                               11,161         11,130         11,078         11,077         11,075

NET INCOME (LOSS) PER COMMON SHARE, DILUTED
- net income (loss)                                        ($1.07)        ($1.30)         $0.59         ($0.76)         $0.14
  Average shares outstanding                               11,161         11,130         11,385         11,077         11,491

CASH DIVIDENDS PER COMMON SHARE                                --             --            --             --             --

PERIOD END BALANCES
  Working capital                                        ($24,340)       $15,158        $29,475        $25,052        $33,740
  Total assets                                            $54,987        $65,311        $86,486        $77,396        $88,944
  Long-term debt, excluding  current maturities              $324        $36,868        $46,086        $50,310        $51,421
  Stockholders' equity                                    ($7,816)        $4,093        $18,434        $11,686        $20,076

SELECTED FINANCIAL RATIOS Net income (loss) to average:
    Total assets                                            (17.0)%        (16.0)%         10.9%          (7.3)%          4.0%
    Stockholders' equity                                    550.4 %       (107.9)%         59.6%         (38.1)%         19.2%
  Average stockholders' equity to average
   Total assets                                              (3.1)%        (14.8)%         18.4%          19.1 %         20.7%
</TABLE>


<PAGE>
Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview
--------

     On a  quarter-to-quarter  basis, the Company's  financial  results have and
will vary widely, due to seasonal  fluctuations and market factors affecting the
demand for logs,  lumber, and other wood products.  Therefore,  past results for
any given year or quarter are not necessarily indicative of future results.

     Lumber market conditions  remained generally weak following the decrease in
demand for North American  lumber in Asia that occurred in fiscal 1998. The unit
price for the benchmark 2x4 standard and better  declined from $403 per unit for
fiscal  1998 to an average of $324 per unit for fiscal  1999,  a 20%  reduction.
During the same period, the unit cost of the #2 fir sawlog - a benchmark for the
Company's raw materials costs - fell from an average of $657 to $563 per unit, a
14% reduction.  With lumber prices declining more than log prices,  margins were
squeezed and profitability  reduced.  Wet winter weather  throughout the Pacific
Northwest  further  exacerbated  market  conditions  and timber  harvest and log
delivery  volumes fell below  expected  levels,  which forced spot log prices to
increase as log supply dwindled.  Due to its low level of log  inventories,  the
Company  was  forced  to either  bid up the  price of logs in order to  maintain
supply or to curtail  production.  Market conditions  improved during the fourth
fiscal quarter as lumber demand remained strong,  log supply  improved,  and log
prices  eased.  The benefit to the  Company of these  improving  conditions  was
reduced by the lack of  available  log  inventory  and need to re-hire and train
employees at several of the Company's facilities.

Yearly Comparisons
------------------

     The  following  table  compares  certain  income  and  expense  items  as a
percentage of net sales,  and the  period-to-period  percentage  change for each
item:
<TABLE>
                                         INCOME AND EXPENSE ITEMS AS             PERCENTAGE
                                            A PERCENT OF NET SALES           INCREASE (DECREASE)
                                     ----------------------------------
                                                                              1999         1998
                                            Year Ended April 30,               vs           vs
                                     ----------------------------------
                                       1999         1998         1997         1998         1997
                                     --------     --------     --------     --------     --------
<S>                                   <C>          <C>          <C>          <C>          <C>
Net sales                             100.0 %      100.0 %      100.0 %      (19.4)%      (14.8)%
Cost of sales                          94.4         95.6         89.8        (20.4)        (9.3)
                                     --------     --------     --------
Gross profit                            5.6          4.4         10.2          2.3        (63.0)

Selling, general and
  administrative expense                5.5          4.7          4.4         (4.9)        (9.9)
Impairment loss                         3.2          1.7          0.0            NM           NM
                                     --------     --------     --------
Operating income (loss)                (3.1)        (1.9)         5.8            NM           NM

Interest expense                       (2.4)        (1.9)        (1.8)         1.1         (6.9)
Miscellaneous                           0.2         (0.2)         0.2            NM           NM
Income (loss) before income taxes      (5.3)        (4.0)         4.3            NM           NM

Provision for income taxes (benefit)   (0.0)         1.0          1.1       (104.1)       (24.2)
                                     --------     --------     --------
Net income (loss)                      (5.3)        (5.0)         3.2 %          NM           NM
NM - Not Meaningful
Note - percentages may not add due to rounding.
</TABLE>
<PAGE>
Comparison of 1999 to 1998
--------------------------

     Net sales for the year ended April 30, 1999  decreased  $47.0 million (19%)
from the year ended April 30, 1998. This decline was principally caused by a 14%
decrease in lumber sales volume and a 6% decrease in the net sales average.  The
reduced lumber shipments in fiscal 1999 as compared to fiscal 1998,  reflect the
closure of the Philomath, Pacific Softwoods, and Sedro-Woolley mills and weather
related curtailments during the winter in fiscal 1999.

     Gross  profit  for the year  ended  April 30,  1999 was 5.6% of net  sales,
compared to 4.4% of net sales for the year ended April 30,  1998.  Lumber  sales
declined  by 11% from the year ended April 30,  1998,  while the  Company's  log
costs  declined by 6%. Unit  manufacturing  costs in fiscal 1999 decreased by 3%
from  costs in fiscal  1998,  primarily  due to a  curtailment  of  higher  cost
operations and an increase in production volume at other operations.

     Selling,  general and  administrative  expenses in the year ended April 30,
1999 decreased by $0.6 million (4.9%) as compared to sales expenses for the year
ended April 30, 1998. This decrease  reflects  reductions in corporate staff and
office lease space as well as the closure of certain facilities.

     During the fourth  quarter of fiscal 1999,  the Company took an  impairment
charge in the amount of $6.3  million to reflect the  Company's  estimate of the
fair value of certain assets that are being held for sale.  Five  facilities are
currently  being held for sale:  Burke Lumber Co., Midway  Engineering,  Pacific
Softwoods, Philomath Forest Products, and Sedro-Woolley Lumber Co. See Note 3 to
Consolidated Financial Statements.

     Other  expenses for fiscal 1999 reflect  payments made to Bruce L. Engel in
connection with his retirement during the first quarter of the fiscal year.

     In the year ended April 30, 1999, the Company sustained significant losses.
Because of the difficult  operating  environment and likely delayed or decreased
use of the Company's deferred tax assets, no income tax benefit was recorded for
the year. The Company  periodically reviews the above factors and may change the
amount of valuation allowance as facts and circumstances  dictate. See Note 7 to
Consolidated Financial Statements.


<PAGE>
Comparison of 1998 to 1997
--------------------------

     Net sales for the year ended April 30, 1998  decreased  $42.0 million (15%)
from the year ended April 30, 1997. This was principally caused by a 9% decrease
in lumber shipments, a 17% decrease in chip deliveries, an 8% decrease in lumber
prices,  and a 28% decrease in other by-product  revenue,  partially offset by a
13%  increase in chip  prices.  The reduced  lumber  shipments  reflect  reduced
production,  which  resulted  from a weak  market in fiscal  1998  compared to a
strong  market in fiscal  1997.  The reduced  lumber  shipments  also reflect an
inadequate  supply of rail cars to ship lumber  during much 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)
and the selling of some trim ends to the Company's  fingerjoint plant instead of
their being chipped.

     Gross  profit  for the year  ended  April 30,  1998 was 4.4% of net  sales,
compared to 10.2% of net sales for the year ended April 30, 1997.  Lumber prices
declined by 8% from the year ended April 30, 1997, while the Company's log costs
declined by only 4%. Lumber production and shipments declined compared to levels
in the prior year,  when  production  levels  reflected  the  favorable  market.
Production  curtailment  occurred in fiscal year 1998 in response to poor lumber
prices and inadequate rail service. Unit manufacturing costs in fiscal year 1998
increased by 3% from costs in fiscal year 1997,  partially  because of a general
wage increase in September 1996 and more production  curtailments in fiscal year
1998.

     Selling,  general and  administrative  expenses in the year ended April 30,
1998  decreased by $1.2 million  (10%) from the year ended April 30, 1997.  This
decrease  reflects  reduced  profit-sharing  bonus payments  stemming from lower
pretax profits, partially offset by expenses associated with the start-up of two
WTD  subsidiaries,  Midway  Engineered  Wood Products,  Inc. and Greenweld North
America Co., in the first quarter of fiscal 1998.

     During the fourth  quarter of fiscal 1998,  the Company took an  impairment
charge in the amount of $4,168,000 to reflect the Company's estimate of the fair
value of its two facilities  held for sale,  Sedro-Woolley  Lumber Co. and Trask
River Lumber Co.

     Interest  expense in the year ended April 30, 1998 was $0.3  million  below
that incurred in the year ended April 30, 1997.  This decrease was the result of
a reduction in the amount of the Company's outstanding debt.

     In the year ended  April 30,  1998,  the Company  recorded a tax  provision
equal to 24% of its  pretax  loss,  compared  to a tax  provision  of 26% of the
pretax income for the previous year.  During fiscal 1998, the Company  sustained
significant operating losses. Because of the difficult operating environment and
the likely  delayed or  decreased  use of the  Company's  deferred tax assets to
shelter  future  income,   the  Company   increased  its  valuation  reserve  to
approximately $9.8 million,  resulting in a charge of $7.3 million in additional
income tax expense in the year ended April 30, 1998.


<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     At April 30, 1999, the Company had a net working  capital  deficit of $24.3
million, $39.5 million less than at April 30, 1998. The working capital decrease
resulted primarily from  reclassifying  most of the Company's  long-term debt as
current, and from the Company's operating losses. The debt was reclassified to a
current  obligation  because  of the  Company's  non-compliance  with  its  loan
covenants.

     Cash and cash equivalents  decreased by $0.03 million during the year ended
April 30, 1999, to $2.1 million at year end.  Approximately $5.3 million of cash
was provided by  operations.  About $1.6 million was used to repay  various debt
obligations.  The Company  also paid $1.7 million in dividends to holders of its
Series A preferred  stock.  The Company is  currently in arrears on interest and
principal  payments and has not paid  dividends to holders of Series A preferred
stock for two consecutive  quarters. In the event that the Company fails to make
a third  consecutive  quarterly  dividend payment to the holders of the Series A
Preferred  Stock,  then the holders of such stock will have the right to elect a
majority of the Company's Board of Directors.

     During fiscal 1999, the Company spent $2.5 million for capital improvements
to its  facilities.  Capital  spending  for the year  ending  April 30,  2000 is
currently  projected  to be  approximately  $5.4  million.  The  Company  had no
material commitments for capital spending at April 30, 1999.

     The  Company  does not have a  credit  facility  for  working  capital  and
therefore  relies on cash provided by its operations to fund its working capital
needs.  There can be no assurance  that such cash will be sufficient to fund the
Company's  operations.  Substantially all of the Company's assets are pledged to
secure its primary debt obligation.

     The Company's  fiscal 1999 results of operations were such that the Company
was unable to remain in compliance with certain financial  covenants as required
by the company's Credit and Security  Agreement dated as of November 30, 1992 as
amended  (the  "Credit  Agreement").  In  addition,  the Company  ceased  making
interest  and  principal  payments on its debt in March 1999.  The Company is in
non-compliance  with the Credit Agreement and is currently in active discussions
with the lenders.  Substantially  improved  operating  conditions  from those in
fiscal  1999  will be  necessary  for the  Company  to  comply  with the  Credit
Agreement.  Operating  conditions  are not expected to improve  sufficiently  in
fiscal  2000 to enable the  Company  to comply  with its  obligations  under the
Credit Agreement. See Note 6 to Consolidated Financial Statements.

     The Company has initiated discussions with its senior lenders to modify the
terms of the Company's debt structure to better  accommodate the cyclical nature
of the Company's business.  The Company has engaged a financial  consulting firm
to assist in  restructuring  its existing debt.  Although the Company has in the
past been able to work with its senior lenders to achieve  modifications  of its
Credit Agreement and is currently negotiating with its senior lenders, there can
be no assurance  that an agreement  will be reached on modified debt terms.  Any
debt  restructuring  is likely to  adversely  impact the  common  and  preferred
shareholders.
<PAGE>
     In accordance with the Company's Credit Agreement, prepayments are required
if the Company's  cumulative operating income exceeds certain specified amounts.
No such  prepayment  will be  required  for the year ended  April 30,  1999.  In
connection with the May 1, 1996 amendment to this Credit Agreement,  the Company
agreed to an additional  prepayment  computed at 30% of quarterly net income. No
payments  were made  during  the year  ended  April 30,  1999  pursuant  to this
provision.  Proceeds from the planned sale of  facilities  held for sale will be
applied to reduce debt.

     The Company has no floating-rate  debt, but the dividend rate on its Series
A Preferred  Stock varies based on Bank of America's prime rate in effect at the
time the dividends  are  declared.  Based on the prime rate in effect at July 2,
1999,  the annual rate on the Series A Preferred  Stock would  decrease by about
$0.03 million from the rate that was in effect in the year ended April 30, 1999.

     The Company does not invest in  derivatives  or other market risk sensitive
instruments.

YEAR 2000 COMPLIANCE

     The Company has  conducted a review of its  computer  and other  systems to
identify  those areas that could be affected  by the "Year 2000"  issue,  and is
implementing a plan to resolve the issue.  The initial phase of the plan,  which
has been completed, consisted of testing existing systems to determine which had
"Year 2000" issues.  The second phase of the Company's "Year 2000" plan consists
of the  replacement  or upgrading of hardware and software which has "Year 2000"
issues. The second phase is nearing  completion.  The remaining work consists of
replacing  and upgrading  the computer  systems at two mills and some  ancillary
software  upgrades at other  locations.  The Year 2000 issue exists because many
computer systems and applications  currently use two-digit fields to designate a
year.  This  practice  can lead to  incorrect  results  when  computer  software
performs  arithmetic  operations,  comparisons,  or data field sorting involving
years later than 1999. The Company  presently  believes,  with  modification  to
existing  software and conversion to new software and hardware,  the "Year 2000"
issue will not create significant operational problems, and the Company does not
anticipate that any such problems will be material to its financial  position or
results of operations in any given year.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

     The  statements  contained  in  this  report  that  are not  statements  of
historical  fact may include  forward-looking  statements (as defined in Section
27A of the  Securities  Act of 1933,  as amended) that involve a number of risks
and  uncertainties.  Moreover,  from time to time the  Company  may issue  other
forward-looking  statements.  The  following  factors are among the factors that
could  cause  actual  results  to  differ  materially  from the  forward-looking
statements   and  should  be  considered  in  evaluating   any   forward-looking
statements.


<PAGE>
Default Under Credit Agreement
------------------------------

     The Company's  fiscal 1999 results of operations were such that the Company
was unable to remain in compliance with certain financial  covenants as required
by the Company's Credit Agreement.  Substantially  improved operating conditions
from those in fiscal 1999 will be  necessary  for the Company to comply with the
Credit Agreement.  Operating conditions are not expected to improve sufficiently
in fiscal 2000 to enable the Company to comply  with its  obligations  under the
Credit Agreement.

     The Company  ceased making  interest and  principal  payments on its senior
secured  debt in March  1999 and  remains  in  arrears  on  these  payments.  In
addition,  the  Company  has not  paid  dividends  to the  holders  of  Series A
Preferred  Stock for two  consecutive  quarters.  In the event that the  Company
fails to make a third consecutive  quarterly  dividend payment to the holders of
the Series A Preferred Stock, then the holders of such stock will have the right
to elect a majority of the Company's Board of Directors.

     The Company has initiated discussions with its senior lenders to modify the
terms of the Company's debt structure to better  accommodate the cyclical nature
of the Company's business.  The Company has engaged a financial  consulting firm
to assist in  restructuring  its existing debt.  Although the Company has in the
past been able to work with its senior lenders to achieve  modifications  of its
Credit Agreement and is currently negotiating with its senior lenders, there can
be no assurance  that an agreement  will be reached on modified debt terms.  Any
debt  restructuring  is likely to have a material  adverse  impact the Company's
common and preferred shareholders.

     If the Company is unable to reach an agreement  with its senior  lenders on
modified debt terms,  such failure would have a material  adverse  effect on the
Company's business, financial condition and results of operations.


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

     The  Company  does not have a  credit  facility  for  working  capital  and
therefore  relies on cash provided by its operations to fund its working capital
needs. The Company's cash flow is affected by numerous factors,  including sales
of its  products,  cost of raw  materials  and seasonal  nature of its business.
There can be no assurance that cash provided by operations will be sufficient to
fund the Company's future operating and capital needs.  Substantially all of the
Company's assets are pledged as security for its primary debt obligation. If the
Company is not able to obtain  sufficient cash to fund its working capital needs
or for an  alternative  source of cash,  such  inability  could  have a material
adverse  impact on the Company's  business,  financial  condition and results of
operation. See Note 6 to Consolidated Financial Statements.



<PAGE>
Adverse Operating Conditions; Fluctuations in Quarterly Results
---------------------------------------------------------------

     Unusually   robust  domestic  demand  for  lumber  and  the  conversion  of
production  capacity  from  export to domestic  demand has,  and may again cause
adverse  operating  conditions  if domestic  demand  cools.  A decline in lumber
demand  to the  levels  experienced  over  the  past  five  years  may  cause an
oversupply of lumber and corresponding weakness in lumber prices.

     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 both the  availability of, and the demand for, logs and the demand for
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.  The demand for
lumber and wood products is primarily  affected by the level of new  residential
construction  activity,  which is  subject  to  fluctuations  due to  changes in
economic  conditions,  real estate prices,  interest rates, credit availability,
property taxes, energy costs,  population growth, weather conditions and general
economic conditions,  all of which are beyond the control of the Company. Demand
for the Company's  products is generally  lower in the fall and winter  quarters
when activity in the construction, industrial, and repair and remodeling markets
is slower,  demand is generally higher in the spring and summer  quarters,  when
these markets are more active. Fire danger and excessively dry or wet conditions
temporarily reduce logging activity and may increase open-market log prices. The
industry is also affected by timber management policies,  which change from time
to time and may cause actual or feared  shortages in some areas.  These policies
change because of  environmental  concerns,  public agency budget issues,  and a
variety  of other  reasons.  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  exports  from  competing
countries,  such as Canada, or discourages  exports to other countries,  such as
Japan. Therefore, past results for any given year or quarter are not necessarily
indicative  of  future  results.  The  Company  believes  that  period-to-period
comparisons  of its financial  results may not be  meaningful  and should not be
relied upon as indications of future performance.

Availability of Logs
--------------------

     Raw  materials  comprise the  majority of the cost of products  sold by the
Company.  The Company depends primarily on open-market log purchases for its raw
material needs. In the past the Company  generally  purchased logs in sufficient
quantities to match the current operating  requirements for its mills. To enable
the Company to operate its  facilities  on a  consistent  basis,  log  inventory
levels need to be sufficient to reduce the risk of temporary closures and reduce
or avoid  high-cost spot log purchases  during periods of adverse  weather.  The
availability and cost of logs are influenced by a variety of factors,  including
demand by competitors and exporters,  the  environmental and harvest policies of
federal and state  agencies,  and, in the long term,  the quantity of commercial
timberland.  Various factors,  including  environmental  and endangered  species
concerns,  particularly  regulations  relating to the northern  spotted owl, the
marbled  murrelet,  and various species of fish have limited,  and are likely to
continue to limit,  the amount of timber offered for sale by certain  government
agencies,  which historically have been major suppliers of timber to the western
forest products industry. State and private timber supplies may be inadequate to
fill the shortfall. Although the Company does not rely significantly on
<PAGE>
purchases of federal  timber,  uncertainty  associated with timber supply issues
combined with  continued  lack of  significant  public timber sales activity may
contribute to log supply and price volatility. The availability of logs may also
be affected by other factors,  which include damage by fire, insect infestation,
disease,  prolonged drought, and other natural disasters. Log and lumber markets
may  continue  to  experience  rapid  changes  in values  because  of actual and
perceived   market   conditions  that  may  sometimes   result  in  inconsistent
relationships between log and lumber prices. These changes could result in large
swings in the gross margin realized by the Company on lumber produced. There can
be no assurance that sales of logs from the Company's current sources may not be
reduced or that the Company will be able to procure sufficient logs at favorable
prices in order to continue  operation of its  manufacturing  facilities  in the
future.  The  inability of the Company to obtain logs in  sufficient  quantities
could  have a  material  adverse  impact on the  Company's  business,  financial
condition, and results of operations.

Technological Change
--------------------

     Technology  and  innovation  continually  impact the  lumber  manufacturing
process.  Changes are continually  being adopted by the industry in general that
cause  mills  to  invest  in  new  capital  equipment  to  remain   competitive.
Depreciation has exceeded capital spending at the Company's core facilities. The
technology  employed at the mills,  generally  lags that of the Company's  major
competitors,  heightening  the risk of  becoming  non-competitive.  The  Company
believes  that the  technological  advances made over the past 5 years and their
adoption by the Company's  competitors will make TreeSource's mills economically
obsolete if capital spending is not increased.

     If the Company is not able to increase  capital  spending to keep pace with
the technological advances adopted by the Company's competitors,  such inability
could  have a  material  adverse  impact on the  Company's  business,  financial
condition and results of operations.

Manufacturing Risks
-------------------

     The Company manufactures softwood and hardwood lumber and by-products. As a
manufacturer, the Company continually faces risks regarding the availability and
cost of raw  materials  and labor,  the potential  need for  additional  capital
equipment,  increases in maintenance  costs,  plant and equipment  obsolescence,
quality control, and excess capacity. See section titled, "Industry Conditions".
The Company  curtails  production  at  facilities  from time to time  because of
conditions that temporarily impair log flow or when imbalances between log costs
and product  prices  cause the cost of operation to exceed the cost of shutdown.
There has been union  activity  at the  Company's  hardwood  facility  and labor
disturbances  may also  curtail or shut down  production.  See  section  titled,
"Employees". The Company may permanently close facilities that are determined to
lack  future  potential  for  profit  under  expected  operating  conditions.  A
disruption in the Company's  production  or  distribution  could have a material
adverse  impact on the Company's  business,  financial  condition and results of
operations.

Federal and State Regulations
-----------------------------

     Laws and regulations  dealing with the Company's  operations are subject to
change and new laws and  regulations  are frequently  introduced  concerning the
timber  industry.
<PAGE>
     From time to time,  bills are introduced in the state  legislatures and the
U.S.  Congress  that  relate  to the  business  of the  Company,  including  the
protection  and  acquisition  of old-growth  and other  timberlands,  endangered
species,   environmental  protection,  and  the  restriction,   regulation,  and
administration  of  timber-harvesting  practices.  The forest products  industry
remains  subject to  potential  state or local ballot  initiatives  and evolving
federal and state case law that could affect timber-harvesting  practices. It is
impossible to assess the effect of such matters on the future operating  results
or  financial  position of the  Company.  The Company is also subject to various
federal,  state,  and local  regulations  regarding waste disposal and pollution
control,  including air, water, and noise pollution.  The cost of remediation at
the Company's sites at Burke,  Vermont;  Philomath,  Oregon;  and Sedro-Woolley,
Washington,  may be more expensive than anticipated and may require the approval
of certain regulators.  See section titled "Environmental  Regulation".  Various
governmental agencies have enacted or are considering  regulations regarding log
yard  management  and  disposal  of log yard  waste  that may  require  material
expenditures  in the  future.  Such  regulations  could have a material  adverse
impact on the Company.



Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial  statements and supplementary  data required by this item are
listed in Item 14 of Part IV of this report, which begins at page 33.


Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

     None.



<PAGE>
                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company as of July 6, 1999, are:

            Name              Age    Position
   ----------------------     ---    ----------------------------------------

   Larry G. Black............ 53     Director
   Scott Christie............ 50     Director
   Richard W. Detweiler...... 57     Director
   Jess R. Drake............. 58     Director, President, and Chief Executive
                                     Officer
   Robert W. Lockwood........ 39     Vice President-Finance, Chief
                                     Financial Officer, and Secretary
   David J. Loftus........... 57     Treasurer
   John C. Stembridge........ 40     Vice President-Sales and Marketing
   William H. Wright......... 63     Director


     The Company  currently has seven seats on its Board of Directors,  with two
positions  vacant  because of the  resignation  in February  1999 of K.  Stanley
Martin, a former Class 3 director and the Company's Vice President-Finance,  and
the resignation in June 1999 of Robert J. Riecke, also a former Class 3 director
and the Company's General Counsel, Secretary, and Vice President-Administration.
The Company  intends to leave these seats  vacant for now, but may elect to fill
them in the future.

     Pursuant to the Company's  Articles of Incorporation and Bylaws,  the Board
is divided into three  classes of  directors,  with each class serving a term of
three years.  The terms of the Class 2 directors,  Messrs.  Black and  Christie,
expire  at the  1999  Annual  Meeting  of  Shareholders.  Mr.  Drake,  a Class 3
director, was elected by the Board in November of 1998 to fill a vacancy created
by  the  retirement  of  the  Company's  former  president.   If  the  Company's
shareholders  approve  Mr.  Drake's  election  at the  1999  Annual  Meeting  of
Shareholders,  Mr.  Drake's board term will expire at the 2000 Annual Meeting of
Shareholders.  The terms of Class 1  Directors,  Messrs.  Wright and  Detweiler,
expire at the 2001 Annual Meeting of Shareholders.

     In the event the Company fails to make three consecutive quarterly dividend
payments, four quarterly dividend payments within twenty-four months, or a total
of eight quarterly dividend  payments,  or if a certain financial ratio covenant
violation  has  occurred  and is  continuing,  on its Series A Preferred  Stock,
holders of such stock may, under the circumstances and in the manner provided in
the Company's Fourth Restated Articles of Incorporation, elect a majority of the
Board of Directors by replacing  incumbent  Board members or increasing the size
of the  Board.  As of July 6,  1999,  the  Company,  to  preserve  cash  for its
operations, has elected not to pay two consecutive dividend payments.


<PAGE>
     Larry G.  Black  has been a  director  since  October  1997.  Mr.  Black is
president of Quinault Corporation ("Quinault"),  which owns approximately 29% of
the  Company's  Common  Stock.  Mr.  Black has been chief  executive  officer of
Quinault  Logging  Company,  which has been in the business of buying timber and
selling  logs since its  formation in 1985.  Mr. Black has been  involved in the
timber industry for more than 30 years. See "Certain  Relationships  and Related
Transactions".

     Scott  Christie  has been a director of the Company  since March 1988.  Mr.
Christie is currently  general  partner of Christie  Capital  Management.  Since
1987, Mr. Christie has been engaged as an investment advisor for his own account
and the account of other  individuals.  From 1983 until 1987,  Mr.  Christie was
senior vice  president  of Kidder,  Peabody & Co.  Incorporated,  an  investment
banking firm. Mr. Christie headed Kidder,  Peabody's  underwriting  team for the
Company's initial public offering and 1987 debenture offering.

     Richard W.  Detweiler  has been a director  of the Company  since  December
1995.  Mr.  Detweiler  is  currently  a  partner  of  Carlisle  Enterprises,  an
investment  partnership.  From 1990 to 1996, Mr.  Detweiler was chief  executive
officer  of  Precision  Aerotech,  a  diversified   manufacturing  company.  Mr.
Detweiler  has 33 years of  manufacturing  management  experience,  including 16
years in general management.

     Jess R.  Drake  has been  the  Company's  president  and a  director  since
November  1998.  From 1987 to 1998,  Mr.  Drake was vice  president  and general
manager of the Northwest  Operations of Simpson  Timber  Company.  Mr. Drake has
experience in  manufacturing,  timberlands,  domestic and  international  sales,
finance,  and  strategic  planning in both the United  States and Canada and has
held  general  management  roles for 20 of his more than 30 years in the  forest
products industry.

     Robert W. Lockwood is chief financial officer and vice president-finance of
the Company,  positions he has held since April 1999,  and secretary  since July
1999. Mr. Lockwood is responsible for all financial affairs of the Company. From
1985 to 1999, Mr. Lockwood was employed by Simpson Investment Company,  where he
held financial and strategic  planning roles in the timber,  wood products,  and
pulp  and  paper  industry  sectors  and most  recently  was the  controller  of
Simpson's Northwest region wood products businesses.

     David J. Loftus was appointed  treasurer of the Company in October 1993 and
continues to serve as vice president-finance of TreeSource,  Inc., the Company's
marketing subsidiary,  a position he has held since May 1986. As treasurer,  Mr.
Loftus is  primarily  responsible  for cash  management  matters  and credit and
banking  relationships.  For the eight  years prior to joining  TreeSource,  Mr.
Loftus served as the  assistant  treasurer  for a  publicly-traded  company with
operations in the forest products industry.



<PAGE>
     John C. Stembridge was appointed vice  president-sales and marketing of the
Company in February 1995 and served as interim chief operating  officer from May
to November of 1998.  Mr.  Stembridge  joined  TreeSource,  Inc.,  the Company's
marketing  subsidiary,  in 1989 and has served as its vice president and general
manager since June 1991. Mr. Stembridge has primary  responsibility for managing
all aspects of the Company's lumber sales and transportation. For the nine years
before joining the Company,  Mr.  Stembridge was involved in domestic and export
lumber sales, primarily with North Pacific Lumber Co.

     William H. Wright has been a director of the Company since April 1992.  Mr.
Wright  has held a  variety  of  management  positions  in the  forest  products
industry since 1957. He is currently president of Heartwood  Consulting Service,
which advises forest  products  clients.  From 1989 until 1994, he was president
and chief  executive  officer of Dee Forest  Products  Inc., a  manufacturer  of
hardboard  and  related  products.  From 1984 to 1989,  Mr.  Wright was  general
manager of Stevenson Co-Ply Inc., a manufacturer of veneer and plywood.

Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange Act"), requires that the Company's officers, directors and persons who
own more than 10 % of the Company's  Common Stock file with the  Securities  and
Exchange  Commission  ("SEC") initial reports of beneficial  ownership on Form 3
and reports of changes in beneficial  ownership of Common Stock and other equity
securities of the Company on Form 4. Officers,  directors,  and greater than 10%
shareholders  of the Company are required by SEC  regulations  to furnish to the
Company  copies of all Section  16(a)  reports that they file.  To the Company's
knowledge,  based solely on reviews of such reports furnished to the Company and
written  representations  that no other reports are required,  all Section 16(a)
filing requirements applicable to its officers,  directors, and greater than 10%
beneficial  owners  were  complied  with  during the fiscal year ended April 30,
1999.




<PAGE>
Item 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

         The following table shows the annual and other compensation paid by the
Company  to  its  chief  executive  officer  and  the  four  other  most  highly
compensated  executive  officers who received in excess of $100,000  (the "Named
Executive Officers") for each of the last three fiscal years.
<TABLE>
                                                                              Long-Term
                                                                             Compensation
                                                                                Awards
   Name and Principal Position           Annual Compensation(1)           --------------------   All Other
   -------------------------------------------------------------------   Number of Securities  Compensation
                                    Year      Salary($)      Bonus($)     Underlying Options       ($)
                                    ----      ---------      --------    --------------------  ------------
<S>                                 <C>       <C>            <C>                 <C>               <C>
Jess R. Drake (2)
President and Chief                 1999      $166,668       $      0            543,295           132,300
  Executive Officer

Bruce L. Engel (3)                  1999      $ 92,323       $      0                 --
President and Chief                 1998      $300,000       $ 68,300                 --           400,000(4)
  Executive Officer                 1997      $300,000       $171,122             35,000

K. Stanley Martin (5)               1999      $109,036       $  4,589                 --
Vice President-Finance and          1998      $120,000       $ 27,320                 --
  Chief Financial Officer           1997      $120,000       $ 68,447             35,000

Robert J. Riecke (6)                1999      $147,439       $  5,048                 --
Vice President-                     1998      $132,000       $ 30,052                 --
 Administration, General            1997      $132,000       $ 75,295             35,000
 Counsel, and Secretary

John C. Stembridge (7)              1999      $158,077       $ 18,166                 --
Vice President-Sales and            1998      $100,000       $ 27,448                 --
 Marketing                          1997      $100,000       $ 80,238             35,000
</TABLE>
(1)  Personal  benefits for each  executive  officer  named in the table did not
     exceed $50,000 or 10% of such executive  officer's  total annual salary and
     bonus  for  the  fiscal  years  ended  April  30,  1999,   1998  and  1997,
     respectively.
(2)  Mr. Drake took office on November 4, 1998; All Other  Compensation  amounts
     include a  $100,000  signing  bonus and  $32,300  for  consulting  services
     provided prior to November 4, 1998.
(3)  Mr. Engel  retired  effective  July 1, 1998.
(4)  Amount paid in  connection  with Mr.  Engel's  retirement.
(5)  Mr. Martin  resigned  effective  February 15, 1999.
(6)  Mr. Riecke resigned  effective June 9, 1999.
(7)  Mr. Stembridge  also served as Interim  Chief  Operating  Officer from May
     through November 1998.
<PAGE>
                        OPTION GRANTS IN LAST FISCAL YEAR

         The following table provides  information on option grants for the last
fiscal year to the Named Executive Officers:

<TABLE>
                                                                                     Potential
                                   Individual Grants                             Realizable Value at
                ----------------------------------------------------------      Assumed Annual Rates
                    # of          % of                                             of Stock Price
                 Securities    Total Options     Exercise                         Appreciation for
                 Underlying     Granted to       or Base                           Option Term(1)
                  Options      Employees in       Price       Expiration  ----------------------------------
   Name           Granted       Fiscal Year      ($/Share)       Date        0%($)      5%($)       10%($)
--------------  -----------    -------------     ---------    ----------  ----------  ----------  ----------
<S>              <C>                <C>           <C>         <C>          <C>         <C>         <C>
Jess R. Drake    543,295(2)         84%           $.7969      11/03/2008   $ 76,401    $396,721    $888,156
</TABLE>
(1)  These  assumed  appreciation  rates are not derived from the  historical or
     projected  prices of the Company's Common Stock or results of operations or
     financial  condition,  and they  should  not be viewed as a  prediction  of
     possible  prices or value for the  Company's  Common  Stock in the  future.
     These  assumed  rates of 5% and 10% would  result in the  Company's  Common
     Stock price increasing from $0.9375 per share to approximately  $1.5270 per
     share and $2.4316 per share, respectively.

(2)  Vesting Schedule:  11/06/98 - 25%; 11/03/99 - 50%; 11/03/00 - 75%; 11/03/01
     - 100%. Market value of the Company's Common Stock on the date of grant was
     $0.9375.


                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

         The following  table provides  information on option  exercises for the
last  fiscal  year by the  named  executive  officers  and the  value  of  their
unexercised options as of April 30, 1999:
<TABLE>
                                       Number of Securities             Value of Unexercised
                                      Underlying Unexercised            In-the-Money Options
                       Shares       Options at April 30, 1999 (#)      at April 30, 1999 ($)(1)
                     Acquired on    -----------------------------    ----------------------------
   Name              Exercise (#)   Exercisable     Unexercisable    Exercisable    Unexercisable
------------------- -------------   -----------     -------------    -----------    -------------
<S>                     <C>          <C>               <C>                <C>            <C>
Jess R. Drake            --          135,824           407,471            0               0

Bruce L. Engel(2)       500          331,625                 0            0               0

Robert J. Riecke(3)      --           57,750            12,250            0               0

John C. Stembridge       --           32,750            12,250            0               0
</TABLE>

(1)  Based on the fair  market  value of the Common  Stock at April 30,  1999 of
     $.4375 per share.
(2)  Mr. Engel retired effective July 1, 1998.
(3)  Mr. Riecke resigned effective June 9, 1999.



<PAGE>
                              EMPLOYMENT AGREEMENTS

     Effective   November  4,  1998,  the  Company  entered  into  a  three-year
Employment  Contract with Jess R. Drake. The Employment Contract provides for an
initial  annual base salary of  $350,000,  with annual  increases if provided to
other executive  officers,  or as deemed  appropriate by the Board of Directors.
Additionally,  a  signing  bonus of  $100,000  was paid  upon  execution  of the
Employment Contract.  The Employment Contract provides for an annual bonus of up
to 180% of the current  annual  salary if certain  financial  and  non-financial
goals are met or exceeded.  The  Employment  Contract also required the grant of
stock options  according to a formula,  which resulted in 543,295  options being
awarded to Mr. Drake, with 25% vesting upon grant and 25% vesting annually until
fully vested. These stock options, were issued outside the Company's 1996 Option
Plan. Vesting of the options is accelerated in certain events including a change
of control,  as defined,  termination  of  employment  for other than cause,  as
defined, or upon acceleration of Company's senior secured debt. Additionally, if
the Company  terminates  Mr. Drake's  employment  without  certain  identifiable
causes,  before  the end of the  Employment  Contract's  term,  the  Company  is
obligated  to pay an  amount  equal to two times Mr.  Drake's  last base  annual
salary and a pro rata share of that year's bonus.  The Company's  senior secured
lenders have agreed to  subordinate  their claims to amounts due Mr. Drake under
the Employment Contract, up to a maximum of $1.1 million. See Exhibits 10.11 and
10.12.

     Effective  April 20, 1999, the Company entered into a three year Employment
Contract with Robert W.  Lockwood.  The provisions are identical to the terms of
the Employment  Contract with Mr. Drake,  except that the starting annual salary
for Mr. Lockwood is $150,000,  there is no signing bonus, the bonus criteria are
different,  and the  annual  bonus  may be up to 80% of Mr.  Lockwood's  current
annual salary. Mr. Lockwood's Employment Contract also provides for the award of
stock options for 200,000 shares, 100,000 of which were issued on April 20, 1999
and the remaining 100,000 of which will be issued on April 20, 2000. These stock
options were issued outside the Company's 1996 Option Plan. The Company's senior
secured  lenders  have  agreed to  subordinate  their  claims to amounts due Mr.
Lockwood  under the  Employment  Contract,  up to a  maximum  of  $500,000.  See
Exhibits 10.13 and 10.14.

Benefits
--------

     The Company  maintains  an Internal  Revenue Code  ("IRC")  Section  401(k)
retirement savings plan under which employees, including executive officers, are
permitted  to make salary  deferral  contributions.  Executive  officers are not
entitled to employer matching contributions pursuant to this plan.


<PAGE>
Compensation of Directors
-------------------------

     Each of the  Company's  outside  directors  is paid an annual  retainer  of
$15,000 for attending up to six Board  meetings,  plus $750 for each  additional
Board  meeting  or  committee  meeting  attended,  and $225  for each  telephone
conference meeting attended or written consent executed.  Directors who are also
employees  of the  Company  do not  receive  additional  compensation  for their
services as directors.  In fiscal 1999,  no outside  directors  received  option
grants. During fiscal 1999, Mr. Wright was paid consulting fees in the amount of
$11,574 for  providing  oversight  assistance to the Company while a replacement
president  was  located,  and for  conducting  the search  that  resulted in the
employment of Mr. Drake.

Executive Bonuses
-----------------

     During the first part of fiscal 1999,  monthly  discretionary  bonuses were
paid to the Company's executive  officers,  as well as other salaried management
and  administrative  employees,  pursuant to the Company's  profit sharing bonus
plan.  The bonuses were based upon monthly net pretax profits and were generally
allocated  according to base salary level. In August 1998, the Company's  profit
sharing  bonus  plan was  changed,  with  respect  to  salaried  management  and
administrative  employees,  to a program  based on  quarterly  results  and paid
quarterly.  Executive  officers are covered in a "key  employee"  bonus  program
based on fiscal  year net  profit  after  tax.  Each of the  president  and vice
president-finance  of the  Company  may  receive  an annual  bonus,  if  certain
financial  and  non-financial  goals are met, up to a maximum of 180% of current
annual salary for the president,  and up to 80% of current annual salary for the
vice  president-finance.  Bonuses  paid  to the  Named  Executive  Officers  for
services  rendered  to the  Company  during  the year ended  April 30,  1999 are
included in the amounts shown in the "Summary  Compensation  Table".

Stock Option Plan
-----------------

     In October 1996 the Company  implemented  a Stock Option Plan ("1996 Option
Plan") to supersede  the 1986 Option Plan,  which  terminated  in July 1996.  In
October  1998,  the  Company's  shareholders  approved an  amendment to the 1996
Option Plan pursuant to which the number of shares of Common Stock available for
issuance under the 1996 Option Plan was increased to 1,425,000  shares,  subject
to adjustment from time to time as provided in the 1996 Option Plan.

     The purpose of the 1996 Option  Plan is to enhance the  long-term  value of
the Company by offering opportunities to those employees,  directors,  officers,
consultants, agents, advisors and independent contractors of the Company and its
subsidiaries who are key to the Company's  growth and success,  and to encourage
them to remain in the service of the Company and its subsidiaries and to acquire
and maintain stock ownership in the Company.

     Not more than  50,000  shares of Common  Stock,  in the  aggregate,  may be
granted  under the 1996 Option Plan to any  participant  during any fiscal year,
except that one-time  grants of options for up to 100,000  shares may be made to
newly hired participants.

     Any shares of Common  Stock  that  cease to be subject to an option  (other
than by reason of exercise),  including,  without limitation, in connection with
the cancellation of an award,  will be available for issuance in connection with
future grants of awards under the 1996 Option Plan.
<PAGE>
     Options  granted  under the 1996  Option Plan will be  "nonqualified  stock
options" (that is, options that are not designed to qualify as "incentive  stock
options,"  as defined in IRC  Section  422).  The option  price for each  option
granted under the 1996 Option Plan will be determined by the plan administrator,
but will be not less than 85% of the Common  Stock's  fair  market  value on the
date of grant.

     The  option  term  will be fixed by the plan  administrator,  but if not so
specified  will be ten years.  Each  option  will be  exercisable  pursuant to a
vesting schedule  determined by the plan  administrator.  If not so established,
the option  will vest over four  years  from the date of grant,  with 20% of the
shares of underlying  Common Stock vesting on the six-month  anniversary  of the
grant  date  and an  additional  20%  of  the  shares  vesting  on the  one-year
anniversary of the option's grant date, and after every  successive  year of the
optionee's  continuous  employment or  relationship  with the Company.  The plan
administrator  will also determine the circumstances  under which an option will
be  exercisable  in the event the  optionee  ceases to provide  services  to the
Company or one of its  subsidiaries.  If not so established,  options  generally
will be  exercisable  for one year after  termination of services as a result of
disability  or death and for one month after all other  terminations.  An option
will not be  exercisable  following an optionee's  termination if the optionee's
services are terminated for cause, as defined in the 1996 Option Plan.

     The  1996  Option  Plan  is  administered  by  the  Company's  Compensation
Committee  with respect to option grants to  employees.  Option grants to others
are administered by the Board of Directors.

Compensation Committee Interlocks
---------------------------------

     The  Compensation  Committee  is composed of two  independent  non-employee
directors, Mr. Christie and Mr. Wright.

     The  Compensation  Committee is responsible  for  recommending  to the full
Board of Directors,  for its approval,  the base  compensation for all executive
officers.  Executive  officers who serve on the Company's  Board of Directors do
not  participate  in  any   deliberations  or  decisions   regarding  their  own
compensation. The Compensation Committee receives recommendations from the chief
executive  officer  regarding  appropriate  levels of base  compensation for the
other executive officers, including executive officers who are directors.

Board Compensation Committee Report on Executive Compensation
-------------------------------------------------------------

     The  Company's  executive  officer  compensation  policies  are designed to
attract,  motivate and retain senior  management by providing an opportunity for
overall  competitive  compensation based on an adequate base compensation amount
and participation in an annual bonus system.

     During  fiscal 1999,  the Board of  Directors  changed the bonus system for
executive  officers.  During the first part of the fiscal  year,  all  executive
officers and all other  salaried  employees at the  TreeSource  corporate  level
received 10% of monthly  consolidated  pre-tax profits,  allocated  according to
base salary level.
<PAGE>
     In August  1998,  the  Company  changed  all  salaried  bonus  programs  to
incorporate  longer-term  measurement  and payout  periods.  At the mill  level,
salaried employees,  excluding certain clerical staff, are eligible for a bonus,
to be computed and paid  quarterly,  based in part on the achievement of certain
manufacturing  goals,  such as the  recovery  level of lumber  derived  from raw
material,  and based in part on the mills  exceeding  quarterly  profit targets.
Salaried  employees at the corporate level, other than executive  officers,  may
receive a quarterly bonus based on company-wide quarterly net profits after tax.
Executive  officers,  participate in a "key employee" bonus program based on the
Company's  fiscal year net profit after tax, with the amount paid into the bonus
pool determined by a preset schedule. See Exhibit 10.4.

     Each of the  president  and vice  president-finance  may  receive an annual
bonus, if certain financial and non-financial  goals are met, of up to a maximum
of 180% of current  annual salary for the  president  and 80% of current  annual
salary for the vice president-finance.

     The Company also uses long-term stock-based incentive  opportunities in the
form of options to purchase the Company's Common Stock.  Executive  officers who
serve  on  the  Company's   Board  of  Directors  do  not   participate  in  any
deliberations  or  decisions  regarding  option  awards to them.  The  Committee
believes that stock-based performance  compensation  arrangements are beneficial
in aligning  management's  and  shareholders'  interests in the  advancement  of
shareholder value.

     During fiscal 1999, Jess R. Drake,  president and chief executive  officer,
was awarded  options for 543,295  shares and Robert W.  Lockwood,  the company's
chief  financial  officer and vice  president-finance,  was awarded  options for
100,000 shares.  No option grants were made to other  executive  officers during
fiscal 1999.

     TreeSource  provides the same group life and health  insurance  coverage to
executive  officers as other  employees  and requires all  employees,  including
executive  officers,  to pay approximately  25% of health insurance  premiums by
payroll deduction. The president is not currently enrolled in the insurance plan
but the Company does  provide to the  president a special  disability  policy to
reflect his higher level of annual compensation.

     The  Company  allows its  executive  officers  and all other  employees  to
contribute a percentage of their  compensation to the  Company-sponsored  401(k)
Retirement Savings Plan. Executive officers and other salaried employees are not
generally entitled to matching contributions.

     Neither the executive officers nor other employees are covered by any other
Company-sponsored retirement plans.

     It is the  Company's  practice  to  participate  in and use, as a basis for
comparison,  an analysis of executive  compensation in the Northwest prepared by
the compensation consulting group of Milliman & Robertson, Inc. This analysis is
useful in establishing  base salary levels and monitoring  overall  compensation
levels as compared to other publicly-traded companies of similar size.

<PAGE>
     Mr. Drake's  employment  with the Company  commenced  November 4, 1998. Mr.
Drake's  cash  compensation  for  fiscal  1999 was  $298,968,  which  includes a
$100,000  signing bonus paid in connection  with the execution of his Employment
Contract and consulting fees. Mr. Drake's annual base salary is $350,000.

     The median  annual  base salary and bonus for chief  executive  officers of
comparably  sized  public  companies,  as  published by the Milliman & Robertson
compensation survey for 1997/1998, are $301,634 and $143,590, respectively.

         Compensation Committee Members

         Scott Christie
         William H. Wright



<PAGE>
Stock Performance Graph
-----------------------

     The following line graph sets forth the total cumulative total  shareholder
return on the  Company's  Common  Stock and the  cumulative  total return of the
companies listed on the Standard and Poor's 500 Stock Index and the Standard and
Poor's Paper & Forest Products Index,  assuming  reinvestment of dividends.  The
comparisons  are not intended to forecast or be  indicative  of possible  future
performance of the Company's Common Stock.


(Graph omitted)
<TABLE>
                             April 1994   April 1995   April 1996   April 1997   April 1998   April 1999
                             ----------   ----------   ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>          <C>          <C>
S&P 500 Index                  100.00       117.47       152.95       191.40       270.00       328.92
TreeSource Industries Inc.     100.00        57.14        22.45        59.18        51.02        14.29
S&P Paper & Forest Products    100.00       120.24       135.24       134.83       171.50       123.38
 Index
</TABLE>
<PAGE>
Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table shows the  beneficial  ownership as of July 6, 1999 of
the Company's  Common Stock by (i) each director,  (ii) each beneficial owner of
more than 5% of the Common Stock, (iii) the Named Executive  Officers,  and (iv)
all directors and officers as a group.  Except as otherwise  specifically noted,
each person  noted below has sole  investment  and voting  power with respect to
shares indicated.

                                            Amount and Nature of
Name and Address of Beneficial Owner      Beneficial Ownership (1)(2)     %
----------------------------------------  -------------------------   ---------
Quinault Corporation
P.O. Box C                                              3,271,300        29.3%
Aberdeen, WA 98570

                                            Amount and Nature of
Name of Directors and Executive Officers   Beneficial Ownership (2)       %
----------------------------------------  -------------------------   ---------
Larry G. Black (3)                                      3,271,300        29.3%
Scott Christie                                             82,500         0.5%
Richard W. Detweiler                                       52,500         0.4%
Jess R. Drake                                             135,824         1.2%
Bruce L. Engel (4)                                        331,625         2.9%
K. Stanley Martin(5)                                           --          --
Robert J. Riecke(6)                                            --          --
John C. Stembridge                                         32,750         0.3%
William H. Wright                                          82,500         0.7%
All directors and executive officers as a               4,040,749        33.9%
group (8 person)

(1)  As  determined  by reference to the  beneficial  owner's most recent Form 4
     filing dated December 7, 1998.
(2)  Includes shares reserved for issuance under options  exercisable  within 60
     days of July 12,  1999 as  follows:  Mr.  Christie  82,500;  Mr.  Detweiler
     52,500;  Mr. Drake  135,824;  Mr. Engel  331,625;  Mr. Loftus  25,750;  Mr.
     Lockwood 25,000; Mr. Stembridge 32,750; and Mr. Wright 82,500.
(3)  Mr. Black, by virtue of being  president and sole director of Quinault,  is
     deemed to beneficially own the shares owned by Quinault.
(4)  Bruce L. Engel retired effective July 1, 1998.
(5)  K. Stanley Martin resigned effective February 15, 1999.
(6)  Robert J. Riecke resigned effective June 9, 1999.
<PAGE>
Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During fiscal 1999,  three of the  Company's  subsidiaries  purchased  logs
worth  approximately  $3.9 million from Quinault Logging  Company.  Mr. Larry G.
Black,  director of the Company,  is chief executive officer of Quinault Logging
Company and is president and sole director of Quinault  Corporation,  beneficial
owner of approximately 29.3% of the Company's Common Stock.


































<PAGE>
                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
                                                                        Page
                                                                        ----
(a) (1)   Financial Statements

     The following  consolidated  financial statements of the
Registrant and its subsidiaries are contained in this report:

         Report of Independent Certified Public Accountants               41

         Consolidated Statements of Operations for the Years
           Ended April 30, 1999, 1998 and 1997                            42

         Consolidated Balance Sheets at April 30, 1999 and 1998           43

         Consolidated Statements of Cash Flows for the Years
           Ended April 30, 1999, 1998 and 1997                            45

         Consolidated Statement of Changes in Stockholders'
           Equity for the Years Ended April 30, 1999,
           1998 and 1997                                                  46

         Notes to Consolidated Financial Statements                       47

(a) (2)   Financial Statement Schedules

     The schedules  called for under  Regulation  S-X are not submitted  because
they are not applicable,  are not required,  or because the required information
is not material or is included in the  financial  statements  or notes  thereto.
                                                                        Page
                                                                        ----
(a) (3)   Exhibit Index

2.1       Final  form of  Registrant's  Second  Amended
          Joint Plan of Reorganization dated October 5,
          1992, filed with the United States Bankruptcy
          Court for the Western District of Washington.
          (1)

3.1       Fourth Restated  Articles of Incorporation of
          the Registrant  adopted November 27, 1992, as
          amended on October 26, 1998. (21)

3.2       Second  Restated  Bylaws  of  the  Registrant
          effective November 27, 1992. (8)


<PAGE>
                                                                        Page
                                                                        ----
4.2       Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (2)

4.2.1     Amendment  dated as of  October  18,  1994 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (9)

4.2.2     Amendment  dated as of  January  27,  1995 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (11)

4.2.3     Amendment  dated as of May 1,  1995 to Credit
          and Security  Agreement  dated as of November
          30, 1992,  between  Registrant  and Principal
          Mutual  Life  Insurance  Company,  Aetna Life
          Insurance  Company,  The Northwestern  Mutual
          Life   Insurance   Company,   Chemical  Bank,
          Seattle-First  National  Bank,  and  Bank  of
          America Oregon. (11)

4.2.4     Amendment  dated  as of  January  1,  1996 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (12)

4.2.5     Amendment  dated as of May 1,  1996 to Credit
          and Security  Agreement  dated as of November
          30, 1992,  between  Registrant  and Principal
          Mutual  Life  Insurance  Company,  Aetna Life
          Insurance  Company,  The Northwestern  Mutual
          Life   Insurance   Company,   Chemical  Bank,
          Seattle-First  National  Bank,  and  Bank  of
          America Oregon. (13)

4.2.6     Amendment  dated as of  December  17, 1996 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (14)

<PAGE>
                                                                        Page
                                                                        ----
4.2.7     Amendment  dated  as of  October  1,  1997 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (17)

4.2.8     Amendment  dated  as of  January  1,  1998 to
          Credit  and  Security  Agreement  dated as of
          November 30,  1992,  between  Registrant  and
          Principal  Mutual  Life  Insurance   Company,
          Aetna    Life    Insurance    Company,    The
          Northwestern  Mutual Life Insurance  Company,
          Chemical Bank,  Seattle-First  National Bank,
          and Bank of America Oregon. (18)

4.2.9     Amendment dated as of April 1, 1998 to Credit
          and Security  Agreement  dated as of November
          30, 1992,  between  Registrant  and Principal
          Mutual  Life  Insurance  Company,  Aetna Life
          Insurance  Company,  The Northwestern  Mutual
          Life   Insurance   Company,   Chemical  Bank,
          Seattle-First  National  Bank,  and  Bank  of
          America Oregon. (22)

4.3       Indenture  dated  as of  November  30,  1992,
          between  Registrant and State Street Bank and
          Trust Company, as Trustee, with respect to 8%
          Senior Subordinated Notes due 2005. (3)

10.1      Amended and  Restated  1986 Stock Option Plan
          dated December 30, 1992.* (4)

10.1.2    Form of Stock Option  Agreement for directors
          of Registrant.* (8)

10.1.3    Form of Stock Option  Agreement for executive
          officers of the Registrant.* (8)

10.1.4    1996  Stock  Option  Plan dated  October  21,
          1996.* (16)

10.1.5    Form of Stock Option  Agreement for directors
          and officers of the Registrant.* (19)

10.1.6    Amendment  dated August 7, 1998 to 1996 Stock
          Option Plan.*                                                   64

10.3      Form   of   Indemnification   Agreement   for
          directors,  officers  and  certain  employees
          effective January 30, 1991.* (8)

10.4      Description  of Key  Employee  Profit-Sharing
          Bonus Plan.*                                                    65

<PAGE>
                                                                        Page
                                                                        ----
10.61     WTD Industries,  Inc. Retirement Savings Plan
          and Trust dated as of May 1, 1989.* (6)

10.62     Amendment  No.  1  to  WTD  Industries,  Inc.
          Retirement  Savings Plan and Trust  Effective
          May 1, 1989.* (7)

10.63     Amendment  No.  2  to  WTD  Industries,  Inc.
          Retirement Savings Plan and Trust adopted May
          30, 1991.* (7)

10.64     Amendment  No.  3  to  WTD  Industries,  Inc.
          Retirement  Savings  Plan and  Trust  adopted
          June 26, 1992.* (7)

10.65     Amendment  No.  4  to  WTD  Industries,  Inc.
          Retirement  Savings  Plan and  Trust  adopted
          April 30, 1993.* (8)

10.66     Amendment  No.  5  to  WTD  Industries,  Inc.
          Retirement  Savings  Plan and  Trust  adopted
          December 28, 1994.* (10)

10.67     Amendment  No.  6  to  WTD  Industries,  Inc.
          Retirement  Savings  Plan and  Trust  adopted
          June 10, 1997.* (19)

10.68     Amendment  No.  7  to  WTD  Industries,  Inc.
          Retirement Savings Plan and Trust adopted May
          18, 1999.*                                                      66

10.8      Amended and Restated  Rights  Agreement dated
          as of March 4, 1998,  between the  Registrant
          and  ChaseMellon   Shareholder  Services,  as
          Rights Agent. (20)

10.9      Employment   Agreement  dated  May  27,  1998
          between Robert J. Riecke and Registrant.* ***
          (22)

10.10     Settlement   Agreement  dated  May  15,  1998
          between Bruce L. Engel and Registrant.* (23)

10.11     Employment  Contract  dated October 31, 1998,
          between Jess R. Drake and Registrant.* (21)

10.12     Stock Option Letter  Agreement dated November
          3,   1998   between   Jess   R.   Drake   and
          Registrant.* (21)

10.13     Employment  Contract  dated  April  6,  1999,
          between  Robert W. Lockwood and  Registrant.*                   67

<PAGE>
                                                                        Page
                                                                        ----
10.14     Non Qualified  Stock Option  Agreement  dated
          April 20, 1999 between Robert W. Lockwood and
          Registrant.*                                                    74

12.2      Computation of Registrant's Net Income (Loss)
          to Average Total Assets.                                        79

12.3      Computation of Registrant's Net Income (Loss)
          to Average Stockholders' Equity.                                80

12.4      Computation    of    Registrant's     Average
          Stockholders' Equity to Average Total Assets.                   81

21.1      Subsidiaries of the Registrant  (list updated
          as of July 12, 1999).                                           82

23.1      Consent  of  Independent   Certified   Public
          Accountants.                                                    83

27.1      Financial Data Schedule**

27.2      Restated Financial Data Schedule**

     (1)  Incorporated  by  reference  to the  exhibit  of  like  number  to the
Registrant's report on Form 8-K dated November 23, 1992.

     (2)  Incorporated  by  reference  to the  exhibit  of  like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  October 31,
1992, previously filed with the Commission.

     (3)  Incorporated  by  reference  to the  exhibit  of  like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  January 31,
1993, previously filed with the Commission.

     (4)   Incorporated  by  reference  to  exhibit  6.0  to  the   Registrant's
Registration  Statement on Form S-8 (No.  33-62714) filed with the Commission on
May 14, 1993.

     (5)  Incorporated  by  reference  to the  exhibit  of  like  number  to the
Registrant's  Registration  Statement on Form S-1 (No.  33-7389)  filed with the
Commission  on July 21, 1986,  as amended by Amendment  Nos. 1 through 3 thereto
filed with the Commission on September 3, 1986, October 14, 1986 and October 24,
1986, respectively.

     (6)  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,  1989,
previously filed with the Commission.
<PAGE>
     (7)  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,  1992,
previously filed with the Commission.

     (8)  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.

     (9)  Incorporated  by  reference  to the  exhibit  of  like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  October 31,
1994, previously filed with the Commission.

     (10)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  January 31,
1995, previously filed with the Commission.

     (11)  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,  1995,
previously filed with the Commission.

     (12)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  January 31,
1996, previously filed with the Commission.

     (13)  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,  1996,
previously filed with the Commission.

     (14)  Incorporated  by  reference  to  exhibit  4.2.4  to the  Registrant's
quarterly report on Form 10-Q for the quarter ended January 31, 1997, previously
filed with the Commission.

     (15)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's report on Form 8-K filed with the Commission on June 12, 1997.

     (16)  Incorporated  by  reference  to  exhibit  99.1  to  the  Registrant's
Registration  Statement on Form S-8 (No. 333-15461) filed with the Commission on
November 4, 1996.

     (17)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  October 31,
1997, previously filed with the Commission.

     (18)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  January 31,
1998, previously filed with the Commission.

     (19)  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,  1997,
previously filed with the Commission.
<PAGE>
     (20) Incorporated by reference to exhibit 2.1 to the Registrant's report on
Form 8-A filed with the Commission on March 20, 1998.

     (21)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly  report on Form 10-Q for the quarter  ended  October 31,
1998, previously filed with the Commission.

     (22)  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,  1998,
previously filed with the Commission.

     (23)  Incorporated  by  reference  to the  exhibit  of like  number  to the
Registrant's  quarterly report on Form 10-Q for the quarter ended July 31, 1998,
previously filed with the Commission.

     *   Management contract or compensatory plan or arrangement.

     **  This schedule has been submitted in the electronic  form  prescribed by
         EDGAR.

     *** A schedule attached to this exhibit  identifies all other documents not
         required  to  be  filed  as  exhibits   because   such   exhibits   are
         substantially identical to this exhibit.

     Except for  instruments  already  filed as exhibits to this Form 10-K,  the
Registrant  agrees  to  furnish  the  Commission  upon  request  a copy  of each
instrument with respect to long-term debt of the Registrant and its consolidated
subsidiaries, the amount of which does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.

(b)       Reports on Form 8-K

          None.



<PAGE>


SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly 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 and Chief Executive Officer
July 26, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated as of July 26, 1999.



/s/ Jess R. Drake                           /s/ Robert W. Lockwood
----------------------------------          ----------------------------------
Jess R. Drake                               Robert W. Lockwood
President, Chief Executive Officer          Vice President-Finance and Chief
and Director                                Financial Officer (Principal
                                            Financial and Accounting Officer)
/s/ Larry G. Black
----------------------------------
Larry G. Black, Director


/s/ Scott Christie
----------------------------------
Scott Christie, Director


/s/ Richard W. Detweiler
----------------------------------
Richard W. Detweiler, Director


/s/ William H. Wright
----------------------------------
William H. Wright, Director


<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders
TreeSource Industries, Inc.

We have  audited the  accompanying  consolidated  balance  sheets of  TreeSource
Industries, Inc. and subsidiaries (the "Company") as of April 30, 1999 and 1998,
and the related consolidated  statement of operations,  stockholders' equity and
cash flows for each of the years in the three-year  period ended April 30, 1999.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,   the  financial  position  of  TreeSource
Industries, Inc. and subsidiaries as of April 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended April 30, 1999, in conformity  with generally  accepted  accounting
principals.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As discussed in Note Two to
the financial  statements,  the Company's  operating  results were such that the
Company was unable to remain in compliance  with certain  financial  performance
covenants  as required by its debt  agreements  and the  Company  ceased  making
interest and  principal  payments on its term debt in March 1999.  These matters
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  The consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                                    /s/ Moss Adams LLP
                                                    ----------------------------
                                                    MOSS ADAMS

Beaverton, Oregon
June 4, 1999


<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (in Thousands, Except Per-Share Amounts)



<TABLE>


                                                            YEAR ENDED APRIL 30,
                                            ----------------------------------------------------
                                                  1999               1998              1997
                                            ---------------    --------------    ---------------
<S>                                         <C>                <C>               <C>
NET SALES                                   $      195,012     $     242,051    $       284,086

COST OF SALES                                      184,015           231,303            255,068

                                            ---------------    --------------    ---------------
GROSS PROFIT                                        10,997            10,748             29,018

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES                             10,738            11,290             12,529
IMPAIRMENT CHARGES                                   6,310             4,168                --

                                            ---------------    --------------    ---------------
OPERATING INCOME (LOSS)                             (6,051)           (4,710)            16,489

OTHER INCOME (EXPENSE)
     Interest expense                               (4,732)           (4,682)            (5,029)
     Miscellaneous                                     441              (394)               630

                                            ---------------    --------------    ---------------
                                                    (4,291)           (5,076)            (4,399)
                                            ---------------    --------------    ---------------
INCOME (LOSS) BEFORE INCOME TAXES                  (10,342)           (9,786)            12,090

PROVISIONS FOR INCOME TAXES (BENEFIT)                  (96)            2,364              3,120

                                            ---------------    ---------------   ---------------
NET INCOME (LOSS)                                  (10,246)           (12,150)            8,970

PREFERRED DIVIDENDS                                  1,671              2,296             2,228

                                            ---------------    ---------------   ---------------
NET INCOME (LOSS) APPLICABLE
  TO COMMON STOCKHOLDERS                    $      (11,917)    $      (14,446)    $       6,742
                                            ===============    ===============    ==============

NET INCOME (LOSS) PER COMMON SHARE
   - BASIC                                          ($1.07)            ($1.30)            $0.61
                                                    =======            =======            ======

   - DILUTED                                        ($1.07)            ($1.30)            $0.59
                                                    =======            =======            ======
</TABLE>








              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                     ASSETS
                                 (in Thousands)

<TABLE>

                                                                          APRIL 30,
                                                                -----------------------------
                                                                    1999            1998
                                                                -------------   -------------
CURRENT ASSETS
<S>                                                             <C>             <C>
   Cash and cash equivalents                                    $      2,131    $      2,157
   Accounts receivable, net                                           10,210          10,464
   Inventories                                                        13,716          14,005
   Prepaid expenses                                                    1,320           1,195
   Income tax refund receivable                                           70              --
   Deferred tax asset                                                    750             750
   Assets held for sale                                                7,749           6,685
   Timber, timberlands and timber-related assets                       2,190           4,252

                                                                -------------   -------------
      Total current assets                                            38,136          39,508


NOTES AND ACCOUNTS RECEIVABLE                                             27             103

PROPERTY, PLANT AND EQUIPMENT, at cost
   Land                                                                1,527           2,849
   Buildings and improvements                                          8,287          11,123
   Machinery and equipment                                            47,462          62,623
                                                                -------------   -------------

                                                                      57,276          76,595
      Less reserve for impairment                                        941              --
      Less accumulated depreciation                                   41,116          52,378

                                                                -------------   -------------
                                                                      15,219          24,217
   Construction in progress                                              324             225

                                                                -------------   -------------
                                                                      15,543          24,442

OTHER ASSETS                                                           1,281           1,258

                                                                -------------   -------------
                                                                $     54,987    $     65,311
                                                                =============   =============

</TABLE>








              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>


                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                    (in Thousands, Except Share Information)


<TABLE>


                                                                           April 30,
                                                                -----------------------------
                                                                     1999            1998
                                                                -------------   -------------
<S>                                                            <C>             <C>
CURRENT LIABILITIES
   Accounts payable                                             $     10,830    $      8,992
   Accrued expenses                                                    7,744           6,568
   Timber contracts payable                                              428             323
   Current maturities of long-term debt                               43,474           8,467
                                                                -------------   -------------
      Total current liabilities                                       62,476          24,350

LONG-TERM DEBT, less current maturities                                  327          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 in 1998)           28,761          28,752
  Additional paid-in capital                                              15              15
  Retained deficit                                                   (57,613)        (45,695)
                                                                -------------   -------------
                                                                      (7,816)          4,093
                                                                -------------   -------------
                                                                $     54,987    $     65,311
                                                                =============   =============
</TABLE>








              The accompanying notes are an integral part of these
                       consolidated financial statements.
<PAGE>

                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in Thousands)
<TABLE>

                                                                           YEAR ENDED APRIL 30,
                                                               ---------------------------------------
                                                                  1999          1998          1997
                                                               -----------   -----------   -----------
<S>                                                            <C>           <C>           <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
  Net income (loss)                                            $  (10,246)   $  (12,150)   $    8,970
  Adjustments to reconcile net income (loss) to
     cash provided by operating activities:
    Depreciation, depletion and amortization                        4,176         5,571         6,353
    Deferred income tax                                             --              913         2,837
    Impairment loss                                                 6,310         4,168         --
    Accounts receivable                                               254         6,366        (6,640)
    Inventories                                                      (205)        3,755        (3,869)
    Prepaid expenses                                                 (125)          622          (249)
    Timber, timberlands and timber-related assets - current         2,062          (392)        2,031
    Payables and accruals                                           3,119        (3,645)        5,399
    Income taxes                                                      (70)        1,145           990

                                                               -----------   -----------   -----------
     Cash provided by operating activities                          5,275         6,353        15,822
                                                               -----------   -----------   -----------

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
  Notes and accounts receivables                                       76            21            40
  Net reductions of  timber and timberlands                         --              629            50
  Acquisition of property, plant and equipment                     (2,479)       (7,807)       (7,450)
  Net book value of disposed idle assets                              458           176           376
  Other investing activities                                          177            51           142

                                                               -----------   -----------   -----------
     Cash used for investing activities                            (1,768)       (6,930)       (6,842)
                                                               -----------   -----------   -----------


CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
  Proceeds from long-term borrowings                                --            --              265
  Principal payments on long-term debt                             (1,582)       (3,190)       (3,321)
  Other assets                                                       (288)          (94)          (69)
  Dividends paid on preferred stock                                (1,672)       (2,296)       (2,228)
  Issuance of common stock                                              9           105             6

                                                               -----------   -----------   -----------
     Cash used for financing activities                            (3,533)       (5,475)       (5,347)
                                                               -----------   -----------   -----------


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (26)       (6,052)        3,633

CASH BALANCE AT BEGINNING OF YEAR                                   2,157         8,209         4,576

                                                               -----------   -----------   -----------
CASH BALANCE AT END OF YEAR                                    $    2,131    $    2,157    $    8,209
                                                               ===========   ===========   ===========


CASH PAID (REFUNDED) DURING THE YEAR FOR:
  Interest                                                         $3,268        $4,696        $4,940
  Income taxes                                                       ($96)         $305         ($711)
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.
<PAGE>



                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (in Thousands)
<TABLE>

                                 SERIES A            SERIES B
                              -----------------------------------                                  RETAINED      STOCK
                              PREFERRED STOCK     PREFERRED STOCK      COMMON STOCK      PAID-IN   EARNINGS      HOLDERS'
                              SHARES   AMOUNT     SHARES   AMOUNT     SHARES   AMOUNT    CAPITAL   (DEFICIT)     EQUITY
                              ------   ------     ------   ------     ------   -------   --------  ---------    --------
<S>                             <C>   <C>            <C>   <C>        <C>      <C>        <C>      <C>         <C>
Balance at April 30, 1996       270   $20,688          6   $  333     11,077   $28,641    $   15   $(37,991)    $ 11,686

Stock options exercised          --        --         --       --          6         6        --         --            6

Dividends paid                   --        --         --       --         --        --        --     (2,228)      (2,228)

Net loss                         --        --         --       --         --        --        --      8,970        8,970

                              ------   ------     ------   ------     ------   -------   --------  ---------    --------
Balance at April 30, 1997       270    20,688          6      333     11,083    28,647        15    (31,249)      18,434

Stock options exercised          --        --         --       --         71       105        --         --          105

Dividends paid                   --        --         --       --         --        --        --     (2,296)      (2,296)

Net income                       --        --         --       --         --        --        --    (12,150)     (12,150)

                              ------   ------     ------   ------     ------   -------   --------  ---------    --------
Balance at April 30, 1998       270    20,688          6      333     11,154    28,752        15    (45,695)       4,093

Stock options exercised          --        --         --       --          9         9        --         --            9

Dividends paid                   --        --         --       --         --        --        --     (1,672)      (1,672)

Net income                       --        --         --       --         --        --        --    (10,246)     (10,246)

                              ------   ------     ------   ------     ------   -------   --------  ---------    --------
Balance at April 30, 1999       270   $20,688          6   $  333     11,163   $28,761        15   $(57,613)    $ (7,816)
                              ======   ======     ======   ======     ======   =======   ========  =========    ========
</TABLE>













              The accompanying notes are an integral part of these
                       consolidated financial statements.


<PAGE>
                  TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of consolidation and operations - The consolidated financial
statements  include the accounts of TreeSource  Industries,  Inc.  (formerly WTD
Industries, Inc.) and its wholly owned subsidiaries (hereinafter "TreeSource" or
"the Company").  All significant  inter-company  accounts and transactions  have
been eliminated.

         The Company operates in one industry segment,  the manufacture and sale
of softwood and hardwood lumber products, wood chips and other by-products. Most
lumber products are sold to  distributors,  and wholesalers or directly to large
retailers.  The  Company's  products  are used in many  applications,  including
residential and commercial construction, packaging and industrial uses.

         The Company's  sales are  predominantly  in the United  States;  export
sales are not material. During the year ended April 30, 1999, the Company had no
customers that accounted for 10% or more of net sales.

         Temporary cash investments and trade  receivables  potentially  subject
the Company to  concentrations  of credit risk. The Company places its temporary
cash investments with high credit-quality financial institutions,  and by policy
limits the amount of credit exposure to any one institution. The Company reviews
a customer's  credit history before extending  credit and continually  evaluates
its accounts  receivable for  collectability.  Concentrations  of credit risk on
trade receivables are limited due to the Company's large number of customers and
their  widely  varying  locations.  Generally,  the  Company  does  not  require
collateral or other security to support its trade receivables.

         Cash and cash  equivalents - Financial  instruments  with a maturity of
three months or less are considered to be cash equivalents.

         Accounts  receivable  - Trade  accounts  receivable  are  shown  net of
allowances for doubtful accounts and discounts of $142,000 and $128,000 at April
30, 1999 and 1998, respectively.







<PAGE>
         Inventories  -  Inventories  are valued at the lower of cost or market.
Cost is  determined  using  the  average  cost and  first-in,  first-out  (FIFO)
methods. A summary of inventory by principal product  classification follows (in
thousands):

                                               APRIL 30,
                               ------------------------------------------
                                      1999                    1998
                               ------------------     -------------------
    Logs                       $           6,649      $            3,791
    Lumber                                 6,001                   8,635
    Supplies and Other                     1,066                   1,579
                               ------------------     -------------------
                               $          13,716      $           14,005
                               ==================     ===================

         At April 30, 1999 and 1998, $553,000 and $642,000, respectively, of log
inventory  was valued at market,  which  approximated  cost.  At April 30, 1999,
$4,893,000  of lumber  inventory  was  valued at  market,  which  represented  a
$429,000 reduction from cost. At April 30, 1998,  $7,787,000 of lumber inventory
was valued at market, which represented a reduction of $1,272,000 from cost.

         Property,  plant and  equipment - Property,  plant and equipment of the
Company's  facilities are stated at cost. For financial reporting purposes,  the
Company uses the units-of-production  method for computing depreciation over the
estimated useful lives of assets, ranging from ten to thirty years for buildings
and  improvements,  and three to ten years for  machinery  and  equipment.  When
assets  are  retired or  disposed  of,  cost and  accumulated  depreciation  are
reversed  from the  related  accounts  and any gain or loss is  included  in the
consolidated statement of operations.

         Timber and timberlands - Timber and timberlands are stated at the lower
of aggregate cost or estimated disposal value, less the amortized cost of timber
harvested.  The portion of the cost  attributable  to standing timber is charged
against  income as timber is cut,  at rates  based on the  relationship  between
unamortized  timber value and the estimated  volume of recoverable  timber.  The
costs of roads and land  improvements  are  capitalized and amortized over their
economic lives.  The carrying costs of timber,  timberlands  and  timber-related
assets  are   expensed  as   incurred.   The  Company   classifies   timber  and
timber-related  assets as current or long-term  based upon expected  harvest and
disposal plans.

         Timber-cutting  contracts - The Company  purchases timber under various
types of contracts.  Certain  contracts,  for which the total  purchase price is
fixed,  are  recorded  as assets  along with the related  liability  at the date
acquired. The remaining contracts, for which the total purchase price depends on
the volume of timber  removed,  are  considered  to be  commitments  and are not
recorded  until the timber is  removed.  See Note 11 to  Consolidated  Financial
Statements.




<PAGE>
         Income taxes - Income taxes are provided for  transactions  in the year
in which they are  reflected in  earnings,  even though they may be reported for
tax purposes in a different year. The resulting difference between taxes charged
to operations and taxes paid is reported as deferred  income taxes.  Tax credits
are recognized in the year utilized,  using the flow-through  method. See Note 7
to Consolidated Financial Statements.

         Accrued  expenses - The  following  is a summary of the  components  of
accrued expenses (in thousands):

                                                   APRIL 30,
                                   ------------------------------------------
                                         1999                    1998
                                   ------------------     -------------------
    Payroll and related items      $           3,995      $            4,145
    Freight payable                            1,366                     934
    Other                                      2,383                   1,489
                                   ------------------     -------------------
                                   $           7,744     $            6,568
                                   ==================     ===================


         Reserves  for  self-insurance  -  workers'  compensation  -  Under  its
self-insurance  plan,  the  Company  accrues  the  estimated  cost  of  workers'
compensation  claims  based on prior  years'  open  claims.  An  accrual of $2.0
million and $1.6  million is included in the  accompanying  fiscal 1999 and 1998
financial statements,  respectively. Payments based on actual fiscal 1999 claims
ultimately filed could differ from these statements.

         Use of  estimates - The  preparation  of the  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying  notes.  Actual results could differ  materially
from those estimates.


<PAGE>
NOTE 2 -   GOING CONCERN

         Market conditions in fiscal 1999 remained  generally weak following the
fall off in demand  for North  American  lumber in Asia.  The unit price for the
benchmark 2x4 standard and better  lumber  declined from $403 for fiscal 1998 to
$324 for fiscal 1999, a 20%  reduction.  During the same period the unit cost of
the raw  material,  #2 fir saw log,  fell from an average of $657 to $563, a 14%
reduction.  Because lumber sales values  declined more than log prices,  margins
were squeezed and  profitability  reduced.  Wet winter  weather  throughout  the
Pacific  Northwest further  exacerbated  market conditions as timber harvest and
log deliveries  volumes fell below expected  levels,  forcing spot log prices to
increase as log supply dwindled.  In response,  the Company curtailed production
at several operations and reduced log inventories.  Conditions  improved late in
the  fourth  quarter  of  fiscal  1999 as  lumber  prices  strengthened  and log
availability improved.

         The Company's fiscal 1999 results were such that the Company was unable
to remain in compliance with certain financial performance covenants as required
by the primary debt agreement.  Additionally, two consecutive preferred dividend
payments due February 28, 1999 and May 31, 1999 were not made.  The Company also
ceased  making  interest and  principal  payments on its senior  secured debt in
March 1999.  Operating  conditions are not expected to improve  sufficiently  in
fiscal 2000 to enable the Company to comply with its primary debt agreement.

         The Company has initiated discussions with its senior lenders to modify
the covenants and payment terms associated with its primary debt agreement.  The
Company has engaged a financial  consulting firm to assist in restructuring  its
existing  debt.  Any debt  restructuring  is  likely  to  adversely  impact  the
Company's  common and  preferred  shareholders.  Although the Company has in the
past been able to work with its senior lenders to achieve  modifications  to its
primary debt  agreement and is currently  negotiating  with its senior  lenders,
there can be no  assurance  that an agreement  will be reached on modified  debt
terms.

         Due to the  uncertainty  related to these  negotiations  and the senior
lenders'  ability to accelerate  the repayment of the Company's  existing  debt,
there  exists  substantial  doubt about the  Company's  ability to continue as a
going concern. The financial statements do not include any adjustment related to
the  carrying  value of assets or  liabilities  should the  Company be unable to
continue as a going concern.



<PAGE>



NOTE 3 -   IMPAIRMENT CHARGES

         The  Company  has  classified  certain  property,  plant and  equipment
related to three  facilities as Assets Held for Sale during fiscal 1999. A total
of five facilities are currently so classified.  In accordance with Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  of," the Company
recorded an impairment  loss  associated  with two  facilities in 1998 and three
facilities in 1999. The resulting  adjustments of approximately  $4.2 million in
1998 and $6.1  million in 1999 were  recorded  to reduce the book value of these
assets to their estimated fair value.  An additional  charge of $0.2 million was
taken to adjust the value of  inventories  and supplies at closed  operations to
their estimated fair market value.  The Company  considers  continued  operating
losses and  significant and long-term  changes in industry  conditions to be its
primary  indicators of potential  impairment.  An impairment was recognized when
the  future  undiscounted  cash  flows of each  facility  were  estimated  to be
insufficient  to recover their related  carrying  values.  As such, the carrying
values of these  assets were  written  down to the  Company's  estimates of fair
value. Fair value was based on recent appraisal values. At April 30, 1999, these
assets have a remaining carrying amount of $7.7 million.  The Company intends to
operate one of these  facilities  while pursuing  alternatives for its sale. The
other four facilities have been shut down and are for sale. Together, these five
facilities  recorded  net sales of $12.0  million,  $74.6  million,  and  $105.1
million, and contributed net operating income (losses) of $(5.5) million, $(4.0)
million,  and $7.1 million for the years ended April 30, 1999,  1998,  and 1997,
respectively,  excluding the  impairment  charges  recognized in fiscal 1998 and
1999.

         The  Company  continually   considers  market  conditions  and  changes
occurring  in the  forest  products  industry  to  evaluate  the  status  of its
individual  mill  facilities,   and  management   believes  that  all  necessary
impairment adjustments have been made at April 30, 1999.



<PAGE>



NOTE 4 -   NET INCOME (LOSS) PER SHARE

         This computation is based on net income (loss) less preferred dividends
paid  during the period,  divided by the  weighted  average  number of shares of
Common  Stock and  equivalents  assumed to be  outstanding  during  the  period.
Anti-dilutive  common stock  equivalents  consisting of certain  employee  stock
options  and  certain  convertible   preferred  stock,  are  excluded  from  the
calculation.

         The  calculations  of net income  (loss) per share for the years  ended
April  30,  1999,  1998 and 1997 are  summarized  below  (in  thousands,  except
per-share data):

<TABLE>
                                                                   Year Ended April 30,
                                                       --------------------------------------------

                                                           1999            1998            1997
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
Net income (loss)                                      $   (10,246)    $  ( 12,150)    $     8,970
Preferred dividends                                          1,671           2,296           2,228
                                                       ------------    ------------    ------------

Net income (loss) applicable to common shareholders    $   (11,917)    $   (14,446)    $     6,742
                                                       ============    ============    ============

Weighted average shares outstanding
- Basic                                                     11,161         11,130           11,078

Additional shares assumed from:
 - Conversion of Series B preferred stock                       -               -              213
 - Exercise of stock options                                    -               -               94
                                                       ------------    ------------    ------------

Average number of shares and equivalents outstanding
 - Diluted                                                  11,161         11,130          11,385
                                                       ============    ============    ============

Net income (loss) per common share
 - Basic                                               $    (1.07)     $    (1.30)     $     0.61
                                                       ============    ============    ============

 - Diluted                                             $    (1.07)     $    (1.30)     $     0.59
                                                       ============    ============    ============
</TABLE>


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









<PAGE>
NOTE 5 -   TIMBER, TIMBERLANDS AND TIMBER-RELATED ASSETS

         The following  summarizes  the  components of timber,  timberlands  and
timber-related assets (in thousands):

                                                          APRIL 30,
                                              --------------------------------
                                                   1999             1998
                                              --------------    --------------
   Timber held under contract                 $         889     $       1,270
   Timber, timberlands, and timber deposits           1,131             2,754
   Logging roads (at amortized cost)                    170               228
                                              --------------    --------------
                                              $       2,190     $       4,252
                                              ==============    ==============

         Timber held under  contract  is composed of various  public and private
timber  contracts  representing  approximately  3.4 million board feet (MMBF) at
April 30, 1999 and 10.0 MMBF at April 30, 1998. Outstanding obligations relating
to these  contracts  at April 30, 1999 and 1998,  were  $428,000  and  $323,000,
respectively.


NOTE 6 -   LONG-TERM DEBT

         Long term debt consists of the following (in thousands):
                                                           Year Ended April 30,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
         Senior secured debt, bearing  interest at 10%;
         principal payable in quarterly installments of
         $225 through December 15, 1997 then quarterly
         installments of $400 through December 15,
         1998, then quarterly installments of $1,000
         beginning March 15, 1999, and a final payment
         in December 2004; secured by substantially all
         assets of the Company.                            $ 42,449    $ 43,744

         Secured notes, interest at 9% and 10%; payable
         on  various  dates; secured by various assets.         359         373


         Unsecured senior  subordinated  notes, net of
         discount of $305 ($329 at April  30,  1997);
         8% coupon, effective interest rate of 13.3%;
         semi-annual  interest  payments  due  each
         June  30 and  December  31; principal due in
         full June 30, 2005.                                     993        967

         Other  unsecured  debt, net of discount of $20
         ($66 at April 30, 1997); payable in equal
         annual installments of $270; non-interest
         bearing; effective interest rate of 12.3%.                         251
                                                           --------    --------
                                                             43,803      45,335

         Less current maturities                            (43,474)     (8,467)
                                                           --------    --------
                                                           $    327    $ 36,868
                                                           ========    ========


<PAGE>
         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,  total  liabilities
ratio (as defined),  and collateral  coverage (as defined).  This agreement also
imposes  certain   restrictions   and   limitations  on  capital   expenditures,
investments,   dividend  payments,  new  indebtedness,   and  transactions  with
officers,  directors,  stockholders and affiliates. This debt agreement was most
recently  amended as of April 1,  1998,  with  respect  to  certain  affirmative
financial  performance  covenants.  As of April 30, 1999,  the Company is not in
compliance  with the  covenant  provisions  relating  to:  level of tangible net
worth; total liabilities ratio; minimum level of adjusted working capital; level
of cumulative adjusted earnings (as defined); and the level of minimum operating
income.

         As  discussed  in Note 2, the  Company  has  been  unable  to  maintain
compliance  with its debt  covenants  and ceased  making  interest and principal
payments on its senior  secured debt in March 1999.  As of April 30,  1999,  the
Company  was in  arrears on payment of  approximately  $1,012,000  interest  and
$1,000,000 in principal on the senior  secured  debt.  As of June 30, 1999,  the
Company  was in  arrears  on  payments a total of  approximately  $1,721,000  in
interest and $2,000,000 of principal on the senior  secured debt.  Additionally,
the  Company is in arrears on payment of  approximately  $120,000 in interest on
the 8% unsecured  senior  notes as of June 30, 1999.  Due to the terms of the 8%
unsecured  senior  notes,  payment  of  interest  cannot be made if a default in
payment of dividends on the Series A preferred  exists.  As of July 6, 1999, the
Company  has not paid two  consecutive  quarterly  dividends  for holders of the
preferred  stock.  (See  Note  2 and  Note  8).  The  Company  is  currently  in
negotiations  with its senior  lenders to modify the terms of its senior secured
debt agreement.  However,  given the uncertainty  associated with the outcome of
these  negotiations and the possible  acceleration of the repayment of this debt
by the senior  lenders,  the entire  balance  has been  classified  as a current
obligation in the accompanying financial statements.

         Due to provisions  relating to the senior  secured debt,  the unsecured
senior subordinated debt has also been classified as a current obligation in the
accompanying financial statements.


<PAGE>
NOTE 7 -   PROVISION FOR INCOME TAXES

         The federal and state income tax  provision  consists of the  following
(in thousands):
<TABLE>

                                                       Year Ended April 30,
                                      --------------------------------------------------
                                           1999              1998              1997
<S>                                   <C>               <C>               <C>
                                      --------------    --------------    --------------
Income (loss) before income taxes     $     (10,342)     $     (9,786)     $     12,090
                                      ==============    ==============    ==============
Provision for income taxes (benefit):
   Federal                            $         (96)    $       2,115     $       2,636
   State                                          0               249               484
                                      --------------    --------------    --------------
                                      $         (96)    $       2,364     $       3,120
                                      ==============    ==============    ==============

   Current                            $         (96)    $       1,451     $         283
   Deferred                                       0               913             2,837
                                      --------------    --------------    --------------
                                      $         (96)    $       2,364     $       3,120
                                      ==============    ==============    ==============
</TABLE>

         The  difference  between the actual income tax provision  (benefit) and
the tax provision  (benefit) computed by applying the statutory federal tax rate
to income (loss) before taxes is attributable to the following (in thousands):
<TABLE>
                                                                       Year Ended April 30,
                                              ---------------------------------------------------------------------
                                                        1999                   1998                    1997
                                              ----------------------  ---------------------  ----------------------
                                                 Amount        %         Amount       %         Amount        %
                                              -----------  ---------  -----------  --------  -----------  ---------
<S>                                              <C>           <C>      <C>          <C>       <C>           <C>
Federal statutory income tax provision           $(3,516)      (34%)    $(3,327)     (34%)     $4,111          34%
(benefit)
State statutory income tax provision                (414)       (4)        (391)      (4)         484           4
(benefit)
Change in valuation allowance for deferred         3,492        34        7,282       74         (414)         (3)
tax assets
Carryback (establishment) of net operating
losses (NOL) in years with rates different            --        --       (1,200)     (12)      (1,061)         (9)
than statutory rates
Other                                                342         3           --       --           --          --
                                              -----------  ---------  -----------  --------  -----------  ---------
Actual income tax provision (benefit)               $(96)        1%      $2,364       24%      $3,120          26%
                                              ===========  =========  ===========  ========  ===========  =========
</TABLE>



<PAGE>
         At April 30, 1999 and 1998,  deferred tax assets and  liabilities  were
composed of the following (in thousands):


                                               Year Ended April 30,
                                               --------------------
                                                 1999        1998
                                               --------    --------
Deferred tax assets:
  Vacation accruals                            $   183     $   248
  Insurance accruals                               670         860
  Professional fee amortization and accruals       188          86
  Depreciation and capitalization differences
    between financial and tax accounting           722        (597)
  Tax benefit of NOL carryforward and
    tax credits carryforward                    12,010       9,862
  Bad debts,  discounts and other                  251          73
                                               --------    --------
Net deferred tax assets                         14,024      10,532

Valuation allowance                            (13,274)     (9,782)
                                               --------    --------

Net deferred tax asset reported                $   750     $   750
                                               ========    ========


         During the current year, the Company  sustained  significant  operating
losses. Because of the difficult operating environment and the likely delayed or
decreased use of the  Company's  deferred tax assets to shelter  future  income,
management  has elected to record no income tax benefit  during the current year
related to the losses  incurred.  This  resulted in an increase to the valuation
reserve of  approximately  $3.7 million for the year ended April 30,  1999.  The
current  year income tax benefit of $117,000 is solely  attributable  to federal
income tax refunds  received  during the current year.  Management  periodically
reviews the above  factors and may change the amount of  valuation  allowance as
facts and circumstances change.

         During  fiscal  1998,  the Company  reevaluated  the level of valuation
reserve  necessary  given the  Company's  operating  performance.  Based on this
reevaluation,  the Company increased its valuation reserve to approximately $9.8
million,  resulting in a charge of $7.3 million in additional income tax expense
in the year ended April 30, 1998.







<PAGE>
         During fiscal 1996, the Company carried back approximately $7.9 million
of net operating  losses  ("NOL") to prior years' tax returns, which resulted in
income tax refund receivables of $2.1 million. The Company received $1.1 million
of these refund  claims in fiscal  1997.  During  fiscal  1998,  the Company was
notified that these  amended tax returns and carryback  claims were under review
by the Internal Revenue Service (IRS).  During the examination,  the IRS and the
Company  settled  the amount of the claims at  approximately  $1  million.  This
resulted in the Company  removing the  remaining  receivables from the books and
recognizing  additional  income tax expense in the year ended April 30, 1998. As
part of the IRS  settlement,  approximately  $4.6  million  of NOL that had been
previously  utilized in the amended tax  returns  and  carryback  claims  became
available for future carryforward to offset future taxable income.

         As of April 30,  1999,  the  Company has  approximately  $27 million of
federal  NOL and  approximately  $25  million of state NOL  available  to offset
future taxable income. These carryforwards expire in 2007 and 2012.



NOTE 8 -   STOCKHOLDERS' EQUITY

         Stockholders' equity at April 30, 1999 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 any accrued dividends at the option of the Board of Directors, in the
form of cash or in  exchange  for senior  unsecured  debt with 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 is currently
in arrears on two  consecutive  quarterly  dividend  payments as of May 31, 1999
totaling  $1,046,000.  If the dividend payment due August 31, 1999, is not made,
the Series A preferred  stockholders will  have the right to elect a majority of
the Company's Board of Directors.

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



<PAGE>
         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  (11,154,374 as of April 30, 1998).  Before giving
effect to any shares that might be issued  pursuant to the management  incentive
stock  option  plan or  conversion  of any Series A preferred  stock,  the total
number of common  shares would  increase to  11,373,589  shares if the remaining
outstanding Series B preferred stock is converted to Common Stock.

         On March 4, 1998, the Board of Directors  adopted a Shareholder  Rights
Plan  ("Plan").  Under  the Plan,  the  Board  declared  a  distribution  of one
Preferred  Share  Purchase  Right  ("Right") for each  outstanding  share of the
Company's  Common Stock.  The  distribution  was payable on March 4, 1998 to the
shareholders   of  record  on  that  day.   The  Rights  are  attached  to,  and
automatically trade with, the outstanding shares of the Company's Common Stock.

     The Rights will become exercisable in the event that any person or group of
affiliated persons becomes a holder of 15% or more of the Company's  outstanding
shares of Common Stock or any person or group of  affiliated  persons who at the
date  of  the  Rights  Agreement,   beneficially   owned  15%  or  more  of  the
then-outstanding shares of Common Stock and has acquired beneficial ownership of
31% or more of the outstanding  shares of Common Stock. In addition,  the Rights
will become exercisable in the event of the commencement of a tender or exchange
offer that, if  consummated,  would result in that person or group of affiliated
persons meeting the  above-listed  requirements as to ownership of the Company's
outstanding  shares of Common Stock.  Once the Rights become  exercisable,  each
Right entitles its holder to purchase, by payment of a $7.50 exercise price, one
one-hundredth  of a share  of  Series C Junior  Participating  Preferred  Stock,
subject  to  adjustment.  In  addition,  at any time  after the above  mentioned
criteria have been met and prior to the acquisition of a 50% position, the Board
of Directors may require each outstanding Right to be exchanged for one share of
Common Stock.  In general,  none of the benefits of the Rights will be available
to a holder of the  Common  Stock who meets the  above-mentioned  criteria.  The
Rights may be  redeemed by the Company at a price of $0.01 per Right at any time
prior to the  above-mentioned  criteria being met and to the expiration  date of
such Rights on March 4, 2008.

         Effective  November 4, 1998, the Company  granted stock options for the
purchase  of  543,295  shares of the  Company's  Common  Stock to Jess R.  Drake
pursuant to his employment contract. The term of these options is ten years from
the date of grant and they are not  transferable  other than by will or the laws
of descent and distribution. The options will vest over a three-year period. The
options  granted  Mr.  Drake are in addition to and not a part of the 1996 Stock
Option Plan.
<PAGE>
NOTE 9 -   STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS

         The  Company  has in  effect  a  Stock  Option  Plan  ("Option  Plan").
Non-qualified   stock   options  may  be  granted  to   directors,   independent
contractors,  consultants  and  employees to acquire up to  1,425,000  shares of
Common  Stock.  Options may be granted for a term not to exceed 10 years and are
not transferable other than by will or the laws of descent and distribution. The
Option Plan provides for incremental vesting based upon the optionee's period of
service with the Company,  and is administered by the Board of Directors.  Stock
options  outstanding at April 30, 1999,  1998 and 1997 related only to employees
and directors.
                                                   Stock Options
                                             -------------------------
                                                             Weighted
                                                              Average
                                              Number of      Exercise
                                               Shares          Price
                                             -----------   -----------

   Shares under option at April 30, 1997      1,164,600         $1.74

         Options granted                              0             0

         Options exercised                      (70,900)         1.48

         Options canceled                       (28,400)         2.04
                                             -----------   -----------

   Shares under option at April 30, 1998      1,065,300          1.75

         Options granted                        643,295          0.72

         Options exercised                       (8,500)         0.99

         Options canceled                      (185,775)         1.62
                                             -----------   -----------

   Shares under option at April 30, 1999      1,514,320         $1.34
                                             ===========   ===========


   Options exercisable at April 30, 1999        923,580         $1.66
                                             ===========   ===========

         Exercise  prices for  options  outstanding  as of April 30, 1999 ranged
from $0.3188 to $3.00. The weighted average remaining  contractual life of those
options is 7.11 years, and the weighted average exercise price is $1.34.
<TABLE>
                 Employee Options Outstanding                         Options Exercisable
--------------------------------------------------------------  ------------------------------
                                Weighted Avg
                     Number       Remaining       Weighted Avg       Number      Weighted Avg
    Range of      Outstanding    Contractual        Exercise      Excercisable     Exercise
 Exercise Price    At 4/30/99       Life              Price        At 4/30/99        Price
 --------------  ------------       ----         -------------    ------------   ------------
<S>              <C>                <C>           <C>               <C>            <C>
  $ 0.95625          31,400          3.7          $ 0.95625          31,400        $0.95625
    1.50000         359,350          3.9            1.50000         359,350         1.50000
    1.51500         304,625          7.5            1.51500         196,356         1.51500
    3.00000         175,650          4.4            3.00000         175,650         3.00000
    0.79690         543,295          9.5            0.79690         135,824         0.79690
    0.31880         100,000         10.0            0.31880          25,000         0.31880
                 -----------                                      ------------
$0.31880-$3.00    1,514,320         7.11            1.33548         923,580        $1.63461
</TABLE>
<PAGE>
         Options for 1,020,375 shares remain available for grant.  These options
will have an exercise  price of an amount per share  determined by the Company's
Board of  Directors,  but not less  than  85% of the  fair  market  value of the
Company's Common Stock on the date of grant.

         The Company maintains a weekly discretionary bonus program for its mill
employees based on the performance of each production shift at individual mills.
The bonus program for mill employees is designed to reward safety, productivity,
and regular attendance. This bonus program is open-ended but designed to attract
good operating  employees by providing them the reasonable  opportunity to reach
high-end pay levels for similar work in the  industry, when average  bonuses are
added to base wages. It is also designed so that manufacturing  labor costs, per
unit of lumber produced, go down as the average bonus level goes up.

         The Company also had a monthly profit-sharing  discretionary bonus plan
for all levels of salaried employees,  based upon pre-tax profits.  This program
was terminated in November 1998 and replaced with two separate  bonus  programs.
The first covers most salaried employees except for senior management,  and is a
quarterly bonus program based on pretax  profits.  The second is an annual bonus
program covering senior  executives and is also based on pre-tax profits.  These
programs,   which   automatically   move  the   Company's   total   general  and
administrative expense up or down in cyclical earnings periods, are vital to the
Company's ability to attract desirable salaried employees at lower than industry
average compensation and benefits; and to retain such employees through cyclical
down-turn in earnings.

         The  following  summarizes  the amounts paid  pursuant to the Company's
bonus programs (in thousands):

                                         Year Ended April 30,
                            ----------------------------------------------
                                 1999            1998            1997
                            --------------  --------------  --------------
    Hourly employee bonus     $  4,100        $  5,200        $  4,700

    Salaried employee bonus        900           1,200           3,600

                              $  5,000        $  6,400        $  8,300
                            ==============  ==============  ==============


         The Company maintains a 401(k) Retirement Savings Plan. Under the plan,
eligible participants may contribute 2 to 20% of their compensation. The Company
matches     contributions     of     employees      participating     in     the
Safety/Production/Attendance  Bonus  program on a monthly  basis in an amount as
determined from time to time by the Board of Directors.  Salaried  employees are
not generally titled to matching contributions. During the years ended April 30,
1999, 1998 and 1997, the Company  incurred  expenses for matching  contributions
and plan  administration  of $261,000;  $289,000;  and  $235,000;  respectively.
Company contributions to this plan are funded on a current basis.


<PAGE>
NOTE 10 -  RELATED PARTY TRANSACTIONS

         The Company  purchased  $3.9 million and $2.1 million of logs in fiscal
1999 and 1998, respectively,  from Quinault Logging Company. Larry G. Black is a
director  and  president  of Quinault  Logging  Company as well as a director of
TreeSource  Industries,  Inc.  and  owns  approximately  30%  of  the  Company's
outstanding Common Stock.


NOTE 11 -  COMMITMENTS AND CONTINGENCIES

         (a) Timber  commitments - At April 30, 1999,  the Company had contracts
to purchase  approximately  19.5 MMBF of timber from the Oregon State Department
of Forestry and others for an estimated  stumpage cost of  $4,381,000.  Deposits
were made on these  contracts and additional  payments are required as timber is
removed. The expiration dates of the contracts are as follows:


                                  Stumpage
  Year Ending April 30,             MMBF                      Cost
  ---------------------     ---------------------     ---------------------
         2000                        0.8                    $229,000
         2001                        6.3                   1,673,000
         2002                       12.4                   2,479,000
  =====================     =====================     =====================
                                    19.5                  $4,381,000

         (b)Leases - At April 30, 1999,  the Company had future  minimum  rental
commitments  for  operating  leases  as  follows:  2000  -  $1,224,000;  2001  -
$1,039,000; 2002 - $676,000; 2003 - $253,000; 2004 - $104,000; thereafter - $0.

         Total  rental  expense for all leases was  $1,613,000,  $1,348,000  and
$1,136,000  for the years ended  April 30,  1999,  1998 and 1997,  respectively.
Actual rental expense  includes  short-term  rentals and leases shorter than one
year, which are not included in the commitments.

         (c)  Litigation  -  The  Company  is  involved  in  certain  litigation
primarily  arising  in the  normal  course of its  business.  In the  opinion of
management,  the Company's liability, if any, under such pending litigation will
not have a material impact upon the Company's  consolidated  financial condition
or results of operations.





<PAGE>
         (d)  Environmental  compliance  - The  Company  is  subject  to various
federal,  state and local  regulations  regarding  waste  disposal and pollution
control.  Various  governmental  agencies  have  enacted,  or  are  considering,
regulations regarding a number of environmental issues that may require material
expenditures  in the  future.  These  include  regulations  regarding  log  yard
management,  disposal of log yard  waste,  kiln  process  waste  water,  and air
emissions from hog fuel fired boilers. The potential  expenditures  required for
the Company to comply with any such  regulations  could have a material  adverse
impact on its  consolidated  financial  condition  and/or results of operations.
However,  management  believes  that the  Company  will be able to  comply  with
existing  regulations  without a material impact on its  consolidated  financial
condition or results of operations.

         (e) Year 2000  compliance - The Company is currently  implementing  its
plan to address those  computer and other systems which could be affected by the
"Year 2000" date problem.  The Company presently believes that with modification
to existing  software and  converting to new software and hardware the Year 2000
problem  will  not  create  significant  operational  difficulties  and  is  not
anticipated to be material to its financial position or results of operations in
any given year.


NOTE 12 -  UNAUDITED QUARTERLY FINANCIAL INFORMATION

         The following quarterly  information for the years ended April 30, 1999
and 1998 is unaudited,  but includes all  adjustments  (including the impairment
charges  recognized  in the fourth  quarters  of 1998 and 1999) that  management
considers  necessary for a fair  presentation of such information (in thousands,
except per-share amounts):

                                      Year Ended April 30, 1999
                      ---------------------------------------------------------
                                         Quarter
                      -----------------------------------------------
                         First      Second      Third       Fourth      Total
                      ---------------------------------------------------------
Net sales              $ 47,661    $ 51,240    $ 44,257    $ 51,854   $ 195,012
Gross profit (loss)    $  3,486    $  3,381    $    984    $  3,146   $  10,997
Net income (loss)      $   (619)   $   (324)   $ (2,682)   $ (6,621)  $ (10,246)
Net income (loss) per  $  (0.11)   $  (0.08)   $  (0.29)   $  (0.59)  $   (1.07)
 diluted common share

                                      Year Ended April 30, 1998
                      ---------------------------------------------------------
                                         Quarter
                      -----------------------------------------------
                         First      Second      Third       Fourth      Total
                      ---------------------------------------------------------
Net sales              $ 68,881    $ 67,387    $ 55,951    $  49,832  $ 242,051
Gross profit (loss)    $  7,040    $  3,533    $ (1,007)   $   1,182  $  10,748
Net income (loss)      $  1,944    $   (198)   $ (3,645)   $ (10,251) $ (12,150)
Net income (loss) per  $   0.12    $  (0.07)   $  (0.38)   $   (0.97) $   (1.30)
 diluted common share

         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.


<PAGE>
NOTE 13-   VALUATION AND QUALIFYING RESERVES


         The  following  table  summarizes  the  activity  associated  with  the
Company's  allowance  for doubtful  accounts and allowance for discounts for the
years ended April 30, 1999, 1998 and 1997 (in thousands):

   Allowance for doubtful accounts -
      deducted from accounts receivable in the
      balance sheet

                                         Year Ended April 30,
                                 -----------------------------------
                                    1999        1998         1997
                                 ----------  -----------  ----------

Balance at beginning of year     $     39    $      49    $     24
Charged to costs and expenses          35            5          29
Deductions (1)                        (19)         (15)         (4)
                                 ----------  -----------  ----------
Balance at end of year           $     55    $      39    $     49
                                 ==========  ===========  ==========



   Allowance for discounts -
      deducted from accounts receivable in the
      balance sheet


                                         Year Ended April 30,
                                 -----------------------------------
                                    1999        1998         1997
                                 ----------  -----------  ----------
Balance at beginning of year     $    146    $    146     $     88
Charged to costs and expense        1,807       2,296        2,696
Deductions(2)                      (1,866)     (2,353)      (2,638)
                                 ----------  -----------  ----------
Balance at end of year           $     87    $     89     $    146
                                 ==========  ===========  ==========


(1) Uncollected receivables written off, net of recoveries.
(2) Discounts taken by customers.