Wood chips were used as raw material in extrusion of wood-plastic composites. Wood-plastic composites with similar to 50 wt-% wood content were manufactured by using two different compounding methods. Dried and undried wood chips were used to investigate the effect of wood moisture content on the wood particle size and whether the drying process could be carried out in the same step. Wood particle properties were measured using optical fibre analysis. Microscopical methods were used to examine the microstructure of wood particles. Furthermore, the prepared composites' mechanical properties were studied. The particle size of wood chips was significantly reduced during extrusion in both processing methods. The undried wood chips had higher aspect ratios in comparison with the dried wood chips after extrusion. Despite the higher aspect ratio, the mechanical properties of composites manufactured with undried wood chips were not better than the properties of composites with dried wood chips