The objective of this research is to study the effect of fungal decay on the mechanical and physical characteristics of thermally treated wood flour-plastic composites. First, the wood chips (Fagus orientalis L.) were treated thermally for 30 and 120 minutes at three various temperatures (120, 150, and 180 °C) under saturated vapor in a steaming vessel and they were ground (40 to 60 mesh size) by wily mill machine. Then polypropylene (PP), thermally treated beech wood flour, and MAPP as compatibilizer were used by melt compounding and injection molding process. Decay resistance, modulus of rupture, modulus of elasticity, notched Izod impact strength, moisture sorption, and swelling of thickness after 2 h and 24 h of soaking in distilled water of WPCs were measured prior to and after being infected by wood-degrading fungus (Coriolus versicolor) for 6 weeks. The modulus of rupture and elasticity, and impact strength of WPCs increased and the moisture sorption and thickness swelling decreased at higher treatment time and temperature. The composite samples produced using heat-treated wood at 180 °C for 120 minutes had the least mass loss. The modulus of rupture and elasticity, and impact strength were reduced after incubation with fungus. Moreover, the results showed that the moisture sorption and thickness swelling for all formulations of unrotted specimens were significantly lower than that of white-rotted specimens.