UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1997

                                       OR

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

                        Commission file number 000-21133

                            SPURLOCK INDUSTRIES, INC.
             (Exact Name of Registrant as Specified in its Charter)

                Virginia                                   84-1018956
      (State or other jurisdiction                      (I.R.S. Employer
   of incorporation or organization)                   Identification No.)

          209 West Main Street
           Waverly, Virginia                                  23890
(Address of Principal Executive Offices)                    (Zip Code)

                                 (804) 834-8980
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None.

           Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, no par value

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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item  405 of  Regulation  S-K is not  contained  in this  form,  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_

         The aggregate  market value of the voting stock of the registrant  held
by  non-affiliates  computed by reference to the average bid and asked prices of
such stock, as of March 24, 1998, was $1,269,100.

         The number of shares  outstanding of Common Stock as of March 31, 1998,
was 6,726,066.


<PAGE>




                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<CAPTION>
                                                                                                   Page
<S>               <C>                                                                                    <C>
Item 1.           Business.......................................................................

Item 2.           Properties.....................................................................

Item 3.           Legal Proceedings..............................................................

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


                                                      PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters........................................................................

Item 6.           Selected Financial Data........................................................

Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operation.......................................................

Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.....................

Item 8.           Financial Statements and Supplementary Data....................................

Item 9.           Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure.........................................


                                                     PART III

Item 10.          Directors and Executive Officers of the Registrant.............................

Item 11.          Executive Compensation.........................................................

Item 12.          Security Ownership of Certain Beneficial Owners and
                  Management.....................................................................

Item 13.          Certain Relationships and Related Transactions.................................


                                                      PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on
                  Form 8-K.......................................................................

</TABLE>

                                      -2-
<PAGE>



                                     PART I

Item 1.           Business

General

         Spurlock  Industries,  Inc. (the  "Company") is a Virginia  corporation
organized in 1996.  The Company is the  successor to Air  Resources  Corporation
("Air  Resources"),  a  Colorado  corporation  organized  in 1986.  At a special
meeting  of the  shareholders  of Air  Resources  held on  June  11,  1996,  the
shareholders  of Air  Resources  approved the merger of Air  Resources  into the
Company,  in order,  among other things, to change the domicile of Air Resources
from  Colorado  to  Virginia.  Such  merger was  consummated  on July 26,  1996.
References herein to the "Company" shall include Air Resources as predecessor to
the Company.

         Through  its  wholly  owned  subsidiary,   Spurlock   Adhesives,   Inc.
("Spurlock Adhesives"), the Company develops, manufactures and markets specialty
thermo-setting  resins  and  formaldehyde  for  the  forest  products,  building
products  and  furniture  industries.  The Company also  produces,  on a limited
basis,  fertilizer  products  for the  agricultural  and lawn and garden  supply
industries.  It operates two manufacturing facilities in the southeastern United
States, one in Waverly, Virginia and the other in Malvern, Arkansas. Products of
Spurlock  Adhesives are sold throughout the east,  southeast and midwest regions
of the United States. A third  manufacturing  facility,  located in Moreau,  New
York, is currently  under  construction  and is expected to begin  operations in
mid-1998.

         The Company's  principal executive offices are located at 209 West Main
Street, Waverly, Virginia 23890, and its telephone number is (804) 834-8980.

History

         Development of Gas Technology Businesses. In 1991, Air Resources formed
Landfill Energy Systems, Inc. and ARC Engineering Fabrications,  Inc. to develop
the equipment and technology  necessary to pursue certain contracts  relating to
landfill gas recovery. The equipment and technology to be developed was intended
to collect raw gases at landfill sites and process them into commercially usable
natural gas for resale.  Air Resources  entered into production  agreements with
two landfill sites in 1991 and conducted feasibility tests in 1992 and 1993. Air
Resources  sustained  substantial  expenses and operating losses associated with
the development of this technology during that time and had discontinued its gas
recovery development operations by March 1994.

         Acquisition  of Spurlock  Adhesives.  On August 5, 1992,  Air Resources
acquired Spurlock Adhesives as a wholly-owned subsidiary. Spurlock Adhesives was
founded in 1973 by Harold N. Spurlock, as sole proprietor,  and was incorporated
in the Commonwealth of Virginia in 1989. The early years of operation  consisted
solely of the  production  of urea resins and liquid  fertilizer  products.  The
business  evolved  primarily  around  the needs of the  growing  composite  wood
products industry.  Mr. Spurlock  developed a number of innovative  products for
the particleboard and medium density fiberboard industries,  including the first
single  component  resin.  This new resin  replaced an expensive  four component
system  that was being used in the medium  density  fiberboard  industry.  Also,
Spurlock Adhesives  developed one of the first lower formaldehyde resins for the
particleboard  industry in response to concerns  expressed by the  environmental
community in the early 1980s.  The process for producing this product was one of
the first processes  patented in this area. See "Patents and Trademarks"  below.
The Company has  maintained its market  leadership in the  development of resins
with lower  levels of  formaldehyde  for the  particleboard  and medium  density
fiberboard industries.

         Over the years,  Spurlock  Adhesives  has  continued to  diversify  its
customer  and market base as well as upgrade its  manufacturing  facilities.  In
1980,   Spurlock   Adhesives  serviced  less  than  10  customers  and  produced
approximately  70 million pounds of resins at its Waverly plant,  as compared to


                                      -3-
<PAGE>

55 customers and 248 million pounds of resins and formaldehyde in 1996. In 1987,
Spurlock  Adhesives built a new resin  production plant adjacent to its existing
one in Waverly, which increased its resin capacity 400%. In a move to vertically
integrate the Waverly facility,  Spurlock Adhesives built its first formaldehyde
production  plant in Waverly in 1988. This plant allowed  Spurlock  Adhesives to
internally  supply  approximately  80%  of  its  formaldehyde  needs  for  resin
production,  thus enabling it to become less  dependent on outside supply and to
better control its raw material costs. In 1992,  Spurlock  Adhesives  acquired a
resin  and  formaldehyde  production  facility  in  Malvern,  Arkansas  from BTL
Specialty Resins Corp. of Toronto, Ontario (Canada) at the time that it became a
wholly  owned  subsidiary  of Air  Resources.  This  acquisition  gave  Spurlock
Adhesives a larger  distribution  area, thus allowing it to compete for business
in the  midwest  region  of the  United  States.  In  1993,  Spurlock  Adhesives
completed a state-of-the-art formaldehyde plant in Waverly, which it leased from
D.B. Western, Inc. until July 1996, when Spurlock Adhesives purchased the plant.
This plant fulfills all of the current  formaldehyde  needs of the Waverly resin
operations  and  offers  Spurlock  Adhesives  the  flexibility  of being able to
produce  additional  marketable  products.   Additional   information  regarding
Spurlock  Adhesives' two  manufacturing  facilities and a third  currently under
construction is set forth under Item 2., "Properties," below.

         Spurlock  Adhesives  is  presently  the  sole  operating  asset  of the
Company. For additional information,  see Item 7., "Management's  Discussion and
Analysis of Financial Condition and Results of Operations," below.

         Acquisition Strategy.  Upon the formation of Air Resources in 1986, the
strategy of management was to seek the  acquisition of existing  businesses that
offered a potential for profit.  This strategy  resulted in Air Resources  being
engaged in  several  unrelated  lines of  business  during its brief  existence.
Present   management  of  the  Company   believes  that  the  Company's   future
profitability  will be enhanced by  de-emphasizing  the acquisition of unrelated
businesses  and  experimental  technologies  and  instead  concentrating  on the
expansion of the businesses that are  complimentary to existing  operations.  In
this  regard,  management  of the  Company  will  from  time  to  time  consider
acquisitions  of carefully  selected  businesses  that are engaged in the use of
formaldehyde or formaldehyde derivatives.

         New York Project.  In the fourth quarter of 1996, the Company purchased
property in the Moreau Industrial Park,  located in South Glens Falls, New York,
obtained the necessary  regulatory  approvals and  initiated  construction  of a
manufacturing  facility  for the  production  of  formaldehyde  and resins.  The
facility consists of two formaldehyde plants (one purchased and one leased), one
resin  plant  and  ancillary  equipment,  buildings  and tank  farms.  The total
estimated cost of the project is $8,300,000 for the purchased plants,  excluding
soft costs such as interest,  environmental permits and legal and administrative
expenses.  D.B. Western,  Inc. is the general contractor of the project and owns
the leased  formaldehyde  plant.  Payments under the lease are $46,139 per month
over a ten-year  term,  with a purchase  option at the end of three  years.  The
financing  sources for the purchased  plants include a term loan for $1,500,000,
amortized  for 10 years at an interest  rate of LIBOR plus 2.75%,  the  proceeds
from a tax-exempt  bond in the amount of $6,000,000  issued by Saratoga  County,
New York,  amortized  for 10 years at a fixed  interest  rate of 4.74%,  and the
Company's  operating cash flow for the remaining $800,000 and the soft costs. As
of December  31,  1997,  the  unexpended  bond fund  balance  was  approximately
$3,890,000. Management believes that construction is proceeding on schedule, and
the Moreau facility is expected to begin operations in mid-1998.

         Management believes that the region to be served by the Moreau facility
is a very favorable market. There is currently industry undercapacity for resins
and  formaldehyde  in this market,  and  purchasers in this region are currently
having to procure  products  from  outside  the  region at higher  prices due to
freight charges  required.  Accordingly,  the Company should be  well-positioned
upon the  plants'  completion  to replace  such  out-of-region  products  and to
maintain satisfactory pricing of the plants' output.


                                      -4-
<PAGE>

Products and Services

         The  major  products   produced  by  Spurlock   Adhesives   consist  of
formaldehyde  and two types of  thermosetting  resins  generally  classified  as
Urea-Formaldehyde   Resins  ("Urea  Resins")  and   Phenol-Formaldehyde   Resins
("Phenolic  Resins").  Within  these two general  resin  types are  specifically
designed  resins  developed  for the specific  needs of certain  industries  and
individual customers. Spurlock Adhesives also produces fertilizer products for a
limited number of customers.

         Urea Resins.  These  resins are used as the binder  system for interior
grade products such as  particleboard,  medium density  fiberboard,  plywood and
coated papers. These products are then used in furniture,  cabinets, wall panels
and cabinet  components.  Spurlock  Adhesives  also  produces  Urea Resin binder
systems for roof mat that later is processed into asphalt roofing shingles. Urea
Resins are thermosetting,  which means that they cure and adhere with the aid of
heat and sometimes  pressure.  They are  characterized as having a Type II bond,
which indicates that they are strong and have a moderate amount of resistance to
moisture and humidity.  The major  materials  involved in the production of Urea
Resins  are  formaldehyde,  urea,  triethanolamine,   sodium  hydroxide,  sodium
chloride  and  other  proprietary  ingredients.   Spurlock  Adhesives  currently
manufactures   and  sells   approximately   36  different  Urea  Resins  to  the
particleboard,  medium density fiberboard,  interior plywood, treated and coated
papers and fiberglass  roof  mat/filter  media segments of the forest  products,
building products and furniture  industries.  Sales of Urea Resins accounted for
70.7%, 73.6% and 67.6% of net sales for the three years ended December 31, 1997,
1996 and 1995, respectively.

         Phenolic  Resins.  These  resins  are  used as the  binder  system  for
exterior grade  construction  materials such as oriented  strandboard,  exterior
plywood and  hardboard,  as well as the binder for  fiberglass  and mineral wool
insulation.  Further,  these resins are also used in paper impregnating for high
pressure   laminates,   such  as  counter   tops.   Phenolic   Resins  are  also
thermosetting,  but are classified as having a Type I bond, indicating that they
provide  better  resistance to moisture and humidity than Urea Resins.  Phenolic
Resins  typically  are slower  curing and more  expensive.  The major  materials
involved in the  production  of these  resins are  formaldehyde,  phenol,  urea,
sodium  hydroxide,  potassium  hydroxide and sulfuric acid.  Spurlock  Adhesives
presently  manufactures and sells  approximately 11 different Phenolic Resins to
the oriented  strandboard,  hardboard,  fiberglass  insulation  and mineral wool
insulation  segments of the forest  products,  building  products and  furniture
industries.  Sales of Phenolic  Resins  accounted for 3.3%, 5.7% and 9.0% of net
sales for the three years ended December 31, 1997, 1996 and 1995, respectively.

         Formaldehyde.  Spurlock  Adhesives  produces  formaldehyde  for its own
internal  consumption,  but also selectively  markets this product to industrial
accounts and other  users.  The major  material  involved in the  production  of
formaldehyde is methanol.  Sales of formaldehyde  accounted for 23.4%, 19.2% and
22% of net sales for the three years ended  December  31,  1997,  1996 and 1995,
respectively.

         Fertilizer.  Spurlock  Adhesives  produces both liquid  fertilizers and
intermediate  fertilizer products,  which are purchased and further processed by
customers  engaged in the manufacture  and sale of fertilizers for  agricultural
and lawn and gardening  uses.  Spurlock  Adhesives'  production of fertilizer is
similar to the production of Urea Resins produced by Spurlock  Adhesives.  There
are no  significant  barriers  to entry  into  this  business  for  other  resin
producers.  This production,  however,  serves to diversify Spurlock  Adhesives'
product  mix in a manner  that  may  reduce  financial  exposure  stemming  from
downturns in the business cycle of the forest  products,  building  products and
furniture industries.  Sales of fertilizers accounted for 3.5%, 1.5% and 2.1% of
net  sales  for the  three  years  ended  December  31,  1997,  1996  and  1995,
respectively.

         Future Products.  Spurlock Adhesives conducts  experimental research to
develop new and better Urea and Phenolic resins for its existing markets. Future
research  will  seek,  among  other  things,  to reduce  further  the  potential
environmental  impact  of  such  resins.  In  addition,  Spurlock  Adhesives  is
developing  several  resins  for new  markets  in which  it does not  materially
participate,  such as Urea Resins 


                                      -5-
<PAGE>

for the  fiberglass  roofing mat and  fiberglass  filter  media  industries  and
Phenolic Resins for the hardboard and high pressure laminates industries.

Sales and Marketing

         Spurlock Adhesives sells its resin products to commercial manufacturers
in  the  forest  products,  building  products  and  furniture  industries.  The
customers of Spurlock  Adhesives include small,  medium and large  thermosetting
resin users located  principally in the east,  southeast and midwest  regions of
the United States.

         Spurlock   Adhesives   seeks  to  attract  medium  to  large  users  of
thermosetting  resins by offering a varied  selection of high quality  resins at
competitive  prices,  coupled  with the  willingness  and  ability to tailor its
products  to  the  customer's  individual  needs  and  specifications.  Spurlock
Adhesives  emphasizes  customer  service  and  the  continual   improvement  and
development  of new  resins  to meet  the  changing  needs  of the  marketplace,
including  resins  with lower  levels of  formaldehyde,  phenol and  methanol to
reduce their potential environmental impact.

         Urea Resins are marketed to manufacturers in the particleboard,  medium
density  fiberboard  and  interior  plywood  segments  of the  forest  products,
building products and furniture industries.  In addition,  Spurlock Adhesives is
seeking to expand its presence in the fiberglass roof mat and fiberglass  filter
media segments of these  industries.  Phenolic  Resins are marketed to different
industry segments,  including the fiberglass insulation and oriented strandboard
segments with recent emphasis on development of the hardboard segment.

         Spurlock  Adhesives has a sales and marketing  staff  consisting of two
full-time  Sales  Managers.  The Sales Managers call on existing and prospective
customers in their individual geographic territories. In circumstances where the
company  seeks to qualify new or  existing  products  in a  particular  industry
segment,  the  Sales  Managers  submit  samples  to  prospective  customers  for
evaluation  and  testing.  The plant  managers of the Waverly  facility  and the
Malvern facility service accounts and assist in the development of new business.
Spurlock Adhesives also employs two independent sales agents to service specific
markets and accounts.  In addition,  the Corporate  Technical Director interacts
with customers and prepares  monthly  Quality  Control Reports for customers who
request them.

         Spurlock  Adhesives  also  markets  itself  and  its  products  through
advertising and participation in industry  associations.  Advertising is usually
limited  to the  placement  of special  features  in trade  publications  and to
general listings of resin producers in trade publications,  annual buyers guides
and other individual directories. Employees of Spurlock Adhesives participate in
various   industry   trade   associations   and   conferences,   including   the
Particleboard/Medium  Density Fiberboard Institute, the Technical Association of
Pulp  and  Paper  Industries,   the  Forest  Products   Research  Society,   the
International  Particleboard/Composite  Materials  Symposium,  the International
Woodworkers Fair and the Amino, Phenolic Wood Adhesive Association.

Customers

         The principal  customers of Spurlock  Adhesives as of December 31, 1997
were  Willamette  Industries  (Malvern,  Arkansas),   Schenectady  International
(Schenectady, New York), Union Camp (Franklin, Virginia) and International Paper
(Waverly and Stuart, Virginia; Spring Hope and Statesville,  North Carolina; and
Jefferson and Nacogadoches, Texas). Sales to each of these customers represented
at least 15%, but not more than 19%, of Spurlock  Adhesives' total  consolidated
net sales for 1997. The loss of any one of these customers could have a material
adverse effect on the financial condition of Spurlock Adhesives.

Raw Materials and Suppliers


                                      -6-
<PAGE>

         The  principal  raw  materials  used in the  production  of resins  and
formaldehyde  are  methanol,  urea and phenol.  These  materials  are  generally
available at present,  and Spurlock Adhesives does not rely on a single producer
for any of its raw materials. Methanol, urea and phenol are commodity chemicals.
In order to assure a continuous  supply of these materials,  Spurlock  Adhesives
enters into multi-year  purchase  contracts with certain producers for a minimum
supply of these commodities.  Purchase orders for commodities are placed several
weeks or months in advance of delivery.  Although  prices for these  commodities
may  fluctuate,  Spurlock  Adhesives  seeks to  minimize  the risk of such price
fluctuations by including  provisions in customer agreements that adjust product
sales prices to reflect changes in Spurlock  Adhesives' raw material costs.  The
amount  of any  change  in raw  material  costs  for  purposes  of  these  price
adjustment  provisions is determined by reference to market indices for specific
commodities.  By matching  increases  and  decreases in raw material  costs with
corresponding  increases  and  decreases in the sales  prices for its  products,
Spurlock Adhesives is better able to maintain profit margins.

Competition

         The  business of  developing  and  manufacturing  liquid  thermosetting
resins is highly  competitive.  The  principal  products of  Spurlock  Adhesives
compete against similar and different products manufactured and sold by numerous
other  companies,  some of which  are  substantially  larger  and  have  greater
resources  than  Spurlock  Adhesives.  The  principal  competitors  of  Spurlock
Adhesives  are  three  large  well-established  manufacturers:   Georgia-Pacific
Resins, a division of Georgia-Pacific  Corporation;  Borden Chemical, a division
of  Borden,  Inc.;  and Neste  Resins,  a Finnish  Company.  Spurlock  Adhesives
competes on the basis of price, quality, product consistency, service, method of
distribution and the ability to tailor products to meet customer needs.

Patents and Trademarks

         Spurlock  Adhesives  is  the  owner  of a  United  States  patent,  no.
4,381,368,  on a process  for the  production  of Urea  Resins.  The  patent was
obtained by Harold N. Spurlock on April 26, 1983,  and was formally  assigned to
Spurlock  Adhesives in January 1996 for no consideration.  The process described
in the  patent  has been  used as the  foundation  for  several  other  products
developed by Spurlock Adhesives.

         Management  of Spurlock  Adhesives  believes  that it has a proprietary
interest  in  certain  processes  for the  production  of  resins  and  that the
competitive  advantage  provided by  maintaining  the  confidentiality  of these
processes  outweighs  any benefits that might be derived from  obtaining  patent
protection for the processes.  Consequently,  Spurlock Adhesives has no plans at
the  present  time to seek  patent  protection  for any such  process.  Spurlock
Adhesives  is not aware of and has not  received any notice or claim that any of
its manufacturing  processes  infringe the proprietary rights of any third party
in any manner that could  materially  affect its business or that would  prevent
Spurlock Adhesives from using its processes.

Seasonality and Backlog

         Sales volume in the thermosetting resins business is closely related to
overall  levels of  activity  in the  forest  products,  building  products  and
furniture  industries.  Historically,  Spurlock  Adhesives'  business  has  been
generally  slower in the winter  months and more vigorous in the spring and fall
months.  In  addition,  the resins  business  is  cyclical  due to the effect of
fluctuations  in the  economy and overall  levels of building  and  construction
activity.  Periods of recession or high interest rates adversely affect building
and construction activity and therefore sales revenues.

         Spurlock  Adhesives  typically has no significant  backlog as customers
generally place monthly  purchase orders that require delivery as of a specified
date as a condition to placing the order.  Spurlock  Adhesives from time to time
must turn down orders if  necessary  to assure that  existing  orders are timely
delivered.

Employees


                                      -7-
<PAGE>

         As of December 31, 1997,  Spurlock Adhesives had 68 full time employees
and one part time employee. The Company does not employ any personnel.  Spurlock
Adhesives'  relationship  with  its  employees  is good.  Approximately  sixteen
employees  located at the  Malvern,  Arkansas  plant are covered by a three year
collective  bargaining agreement between Spurlock Adhesives and the United Steel
Workers of America that expires June 30, 1999.

Government Regulation

         The   Company  is  subject   to  various   federal,   state  and  local
environmental laws and regulations that limit the discharge,  storage,  handling
and  disposal of a variety of  substances.  The  Company's  operations  are also
governed  by laws and  regulations  relating  to  work-place  safety  and worker
health,  principally the Occupational  Safety and Health  Administration  Act of
1970 and  accompanying  regulations  and  various  state  laws and  regulations.
Spurlock  Adhesives believes that it presently complies in all material respects
with the  foregoing  laws and  regulations  and does  not  believe  that  future
compliance with such laws and regulations will have a material adverse effect on
its financial condition or results of operations. See Note 1 to the Consolidated
Financial  Statements.  Expenditures  for  environmental  compliance,  which are
considered by the Company to be a customary and recurring cost of doing business
in its industry,  averaged  approximately  $221,228 for each of the three fiscal
years ended  December 31, 1997.  See  "Management's  Discussion  and Analysis of
Financial  Corporation and Results of Operations - Compliance with Environmental
Regulations."

Item 2.           Properties

         The  Company  conducts  its  business  operations  primarily  from  two
manufacturing facilities located in Waverly,  Virginia and Malvern,  Arkansas. A
third  manufacturing  facility is  currently  being  constructed  in South Glens
Falls,  New York. The Company's  headquarters  and chief  executive  offices are
located in leased  office space in Waverly,  Virginia.  Management  believes the
properties  are in good condition and suitable for the Company's  purposes.  The
Company's three  manufacturing  facilities are encumbered  under existing credit
arrangements.

         Executive  Offices.  Spurlock  Adhesives is leasing on a month-to-month
basis office space in the James River Bank building in Waverly,  Virginia.  This
space consists of five offices and a reception area and is  approximately  2,000
square feet.  The Company has entered into a contract to purchase a small office
building in Waverly that contains  approximately 2,700 square feet of space. The
Company plans to occupy this space on or about August 1, 1998.

         Waverly Facility.  Spurlock Adhesives owns and operates a facility on a
13-acre  industrial site located about three miles northwest of the intersection
of state highways 40 and 460 near Waverly,  Virginia.  The facility  consists of
two resin plants and two  formaldehyde  plants.  The plants produce Urea Resins,
Phenolic  Resins and  formaldehyde.  In 1997,  the resin plants were operated at
approximately  43% of capacity  and the  formaldehyde  plants  were  operated at
approximately 83% of capacity.

         Malvern Facility. Spurlock Adhesives owns and operates a facility on 67
acres of land in  Gillford,  Arkansas,  approximately  five miles  northeast  of
Malvern, Arkansas. The facility consists of a resin plant, a formaldehyde plant,
two  administrative  offices and a research  facility.  The plants  produce Urea
Resins, Phenolic Resins and formaldehyde.  In 1997, the resin plant was operated
at  approximately  52% of capacity  and the  formaldehyde  plant was operated at
approximately  67% of capacity.  The Company's  major  research  activities  are
conducted at the Malvern facility.

         Moreau Facility.  In the fourth quarter of 1996, the Company  purchased
property in the Moreau Industrial Park,  located in South Glens Falls, New York,
obtained the necessary  regulatory  approvals and  initiated  construction  of a
manufacturing  facility  for the  production  of  formaldehyde  and resins.  The
facility consists of two formaldehyde plants (one purchased and one leased), one
resin  plant  and  ancillary  equipment,  buildings  and tank  farms.  The total
estimated cost of the project is $8,300,000 for the 


                                      -8-
<PAGE>

purchased plants,  excluding soft costs such as interest,  environmental permits
and legal  and  administrative  expenses.  D.B.  Western,  Inc.  is the  general
contractor of the project and owns the leased formaldehyde plant. Payments under
the lease are $46,139 per month over a ten-year term,  with a purchase option at
the end of three years. The financing sources for the purchased plants include a
term loan for  $1,500,000,  amortized  for 10 years at an interest rate of LIBOR
plus 2.75%,  the  proceeds  from a tax-exempt  bond in the amount of  $6,000,000
issued by Saratoga County, New York,  amortized for 10 years at a fixed interest
rate of 4.74%, and the Company's  operating cash flow for the remaining $800,000
and the soft costs.  As of December 31, 1997, the  unexpended  bond fund balance
was  approximately   $3,890,000.   Management   believes  that  construction  is
proceeding on schedule,  and the Moreau facility is expected to begin operations
in mid-1998.


Item 3.           Legal Proceedings

Summary

         In late January and early February 1998,  the Company  discovered  that
two of its officers and  directors,  Irvine R. Spurlock and H. Norman  Spurlock,
Jr., had  diverted  corporate  funds for  personal use and that,  according to a
report of a Special Litigation Committee of the Company's Board of Directors,  a
third  officer,  Warren  E.  Beam,  had  colluded  in the  diversions  by Norman
Spurlock. Following these discoveries,  Norman Spurlock and Mr. Beam resigned as
officers and employees of the Company and Spurlock Adhesives and Norman Spurlock
also  resigned  as a director of both  companies.  Irvine  Spurlock  resigned as
Chairman  of the Board,  Chief  Executive  Officer  and a  director  of both the
Company and Spurlock Adhesives,  but was retained by the Board of Directors with
the title of President of both  companies  because of his current  importance to
their  operations,  but without any check writing or other financial  authority.
Irvine Spurlock made  restitution for his defalcation,  and,  effective April 8,
1998,  Norman Spurlock  entered into a settlement  agreement to make restitution
for his defalcation.  An investigation by the Special  Litigation  Committee and
the Company's new  independent  accounting firm concluded that no other officers
or directors of either the Company or Spurlock  Adhesives  were  involved in the
defalcations.

Shareholders' Derivative Suit

         On  April  28,  1997,  seven   shareholders  of  the  Company  filed  a
shareholders' derivative suit against the Company and certain current and former
officers and directors of the Company in Colorado  state court.  The lawsuit was
subsequently  removed to the United  States  District  Court for the District of
Colorado  (the  "District  Court").  The Company has  previously  disclosed  the
lawsuit to the  Securities and Exchange  Commission  (the  "Commission")  in the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997.

         The  shareholders'  derivative  suit,  Rasmussen  et  al.  v.  Spurlock
Industries,  Inc.,  et al.  (Civil  Action  No.  97-D-2214),  alleges  that  the
defendants  named therein  engaged in various  activities  that  breached  their
fiduciary  duties to the plaintiffs  and/or violated  provisions of Colorado law
applicable to domestic corporations.  The activities so alleged include wrongful
payment and  wrongful  guarantee  of debts of one or more  defendants,  unlawful
loans  and  distributions  to  defendants,  unfair  dealings  with  one or  more
defendants,   overcompensation  of  defendants  and  other  employees,  wrongful
depression of the Company's stock price,  misrepresentation  as to shareholders,
and improper approval of the merger of Air Resources  Corporation (the Company's
predecessor) into the Company.  The plaintiffs seek a declaratory  judgment with
respect to the acts  complained of,  repayment of certain monies to the Company,
an  accounting  of all  financial  transactions  of the Company from 1992 to the
present,  a  constructive  trust of  shares  of  common  stock  held by  certain
defendants, injunctive relief and damages.

         In May 1997,  the  Company's  Board of  Directors,  in  response to the
lawsuit, appointed a Special Litigation Committee to investigate the allegations
and to determine  whether  maintenance of the  derivative  proceeding was in the
best interests of the Company.  The members of the Special Litigation  


                                      -9-
<PAGE>

Committee are Raymond G. Tuttle and Glen S.  Whitwer,  the Company's two outside
directors,  neither of whom is named as a  defendant  in the  lawsuit  nor was a
member of the  Board of  Directors  during  the time  period  of the  activities
alleged in the lawsuit.  The Special  Litigation  Committee engaged  independent
outside  counsel to advise it in its  investigation,  and performed an extensive
investigation  including the collection and review of a large number of relevant
corporate and related  documents,  and interviews of current and former officers
and directors,  the Company's independent auditor and its outside legal counsel.
In a report  delivered  to the  District  Court in  October  1997,  the  Special
Litigation  Committee  determined that maintenance of the lawsuit was not in the
best interests of the Company.  Based on the findings of the Special  Litigation
Committee,  the  Company  filed  a  Motion  for  Summary  Judgment  against  the
plaintiffs on November 12, 1997.

         As a result of the events  summarized  under  "Summary"  above and more
particularly  described  below,  on  February  9, 1998 and March 26,  1998,  the
Special Litigation  Committee  requested that the District Court delay ruling on
the Motion for Summary  Judgment to allow the Special  Litigation  Committee  to
investigate the facts surrounding these events. The Special Litigation Committee
filed a supplemental  report with the District Court on April 13, 1998 (the "SLC
Supplement"), and the Motion for Summary Judgment remains pending.

Creation of Audit Committee

         In November 1997, at the request of the Special  Litigation  Committee,
the Board of Directors  created an Audit  Committee,  which  consists of Messrs.
Tuttle and Whitwer.  The initial  responsibility  of the Audit  Committee was to
identify a new auditor  for the  Company.  The  Company  wished to appoint a new
auditor  primarily  because  the  auditor at that  time,  James E.  Scheifley  &
Associates, P.C. (formerly Winter, Scheifley & Associates,  P.C.) ("Scheifley"),
was located in  Colorado  and  recently  had one of its two  partners  leave its
practice.  As the Audit  Committee  considered  proposals from other firms,  Mr.
Whitwer  asked  Phillip S.  Sumpter,  then  Executive  Vice  President and Chief
Financial  Officer of the Company,  to request that  Scheifley  examine,  in the
course  of  the  audit  of the  1997  fiscal  year,  insider  transactions,  and
specifically loans to officers, to ensure that such loans were current.

Discovery of Diversion of Corporate Funds by Officers and Directors

         On January 9, 1998,  Catharine Spurlock,  the Company's  Administrative
Assistant and wife of Irvine Spurlock,  then Chairman of the Board of Directors,
President and Chief Executive Officer of the Company,  addressed Irvine Spurlock
with concerns over unusually high charges on the Company's credit card by Norman
Spurlock,  then Executive  Vice  President and Secretary of the Company.  Irvine
Spurlock  consulted with Mr.  Sumpter,  who examined the credit card records and
concluded that these charges were a problem.  When  confronted,  Norman Spurlock
admitted to charging  personal  expenses on the  Company's  credit card over the
previous two months.  Norman Spurlock also revealed that he was in default on an
authorized loan with the Company and asserted that he was pursuing a home equity
loan in order to make  restitution for both the unauthorized  personal  expenses
and the outstanding loan payments.

         On January 14, 1998,  Scheifley  began the 1997 audit at the  Company's
principal  executive  offices.  Scheifley  met with Mr.  Sumpter to discuss  the
issues surrounding Norman Spurlock's loan default, but did not receive notice of
any concerns regarding unauthorized credit card transactions by Norman Spurlock,
and was  unable  to  procure  certain  information  requested  of  Warren  Beam,
Controller,  with respect to charges on one of the Company's  primary  corporate
credit cards. Scheifley did not identify any additional problems.

         On January 21, 1998, Mr. Whitwer met with Irvine Spurlock,  Mr. Sumpter
and the Company's  corporate  legal counsel to discuss what actions the Board of
Directors should take with respect to Norman Spurlock,  and the implications for
the Special  Litigation  Committee's  report.  It was decided that,  before such
decisions  could  be made,  Mr.  Sumpter  would  review  records  to  ensure  an
understanding  of the status of officer loans to Norman  Spurlock.  Mr.  Whitwer
expressed  the opinion that it would be necessary to conduct a special  audit of
officer loans and officer expenses to ensure that the Company reached the bottom
of the problem.


                                      -10-
<PAGE>

         On January 22, 1998, Mr.  Sumpter  discovered  $11,000 of  unauthorized
advances  to Norman  Spurlock  in 1996 and  additional  advances  in 1995.  When
confronted with these findings on January 23, 1998,  Norman Spurlock admitted to
the unauthorized advances and, at the demand of Harold Spurlock, Sr., a director
and the  founder of the  Company  and the father of Irvine  Spurlock  and Norman
Spurlock,  resigned  as an  officer,  director  and  employee of the Company and
Spurlock Adhesives. Further internal investigations by Mr. Sumpter uncovered, in
addition to the unauthorized advances and loan defaults, substantial credit card
abuse by Norman Spurlock, with a total defalcation estimated at $150,000.

         In light of the  discoveries  involving  Norman  Spurlock,  Warren Beam
resigned  as  Controller-Treasurer  of the  Company and  Spurlock  Adhesives  on
January 26, 1998.  As set forth in the SLC  Supplement,  the Special  Litigation
Committee  investigation  indicated  that,  while there was no evidence that Mr.
Beam personally  received any of the diverted funds,  Mr. Beam had colluded with
Norman Spurlock.

         By February 5, 1998, the Audit Committee had engaged Cherry,  Bekaert &
Holland,  L.L.P.  ("Cherry,  Bekaert")  to conduct a full  investigation  of all
officer  salaries,  perquisites,  loans and advances and to assess the impact of
any and all misuse of the Company's funds. In addition,  the Company  determined
to  request a  postponement  in the  District  Court's  ruling on the Motion for
Summary  Judgment  in  order  that  the  Special   Litigation   Committee  could
investigate the newly discovered information and supplement its previous report,
as necessary.

         On  February  8,  1998,  after  Cherry,   Bekaert's  investigation  had
commenced,  Irvine  Spurlock,  through his counsel,  disclosed to the  Company's
outside  legal  counsel that he had received  two  unauthorized  advances in the
amounts of $42,500  and  $9,200,  both of which had been  fully  repaid,  and an
additional unauthorized advance in the amount of $73,075.86,  which had not been
repaid.  Upon this admission,  Irvine Spurlock provided the Company with a check
in the amount of  $73,075.86  and  offered to resign if  requested  to do so. On
February 9, 1998,  Irvine Spurlock  disclosed further to Mr. Sumpter that he had
made  personal  charges on the Company's  credit card in an estimated  amount of
$7,000 to $8,000.

         The Board of  Directors  met on February 11, 1998 to take action on the
information  that had been uncovered to date,  including  recent  disclosures by
Irvine Spurlock. At the meeting, the Board of Directors asked Irvine Spurlock to
resign as Chairman and a member of the Board of Directors and as Chief Executive
Officer of both the Company and Spurlock  Adhesives.  Following the tendering of
these resignations, the Board of Directors elected Mr. Sumpter to replace Irvine
Spurlock as Chairman of the Board and Chief Executive Officer of the Company and
Spurlock Adhesives.

         The Board of Directors decided, nevertheless, to retain Irvine Spurlock
with the title of  President  of both the Company  and  Spurlock  Adhesives.  In
reaching  such a  decision,  the Board of  Directors  weighed the gravity of his
actions against the possible impact to the Company of his departure. Among other
considerations,  the Board of Directors  acknowledged  the  importance of Irvine
Spurlock's  role in the critical area of purchasing of raw materials used in the
Company's production process, his long-standing relationships with the Company's
customers  and  lenders,   and  his   extensive   background  in  the  Company's
manufacturing  operations  where  he  acts  as  the  Company's  final  technical
authority.  The Board  also took into  account  the strain  placed on  remaining
management by the recent resignations of two other executive officers, given the
Company's small executive staff.  The Board of Directors  concluded that, due to
the skills provided by Irvine Spurlock,  his departure at that time could result
in  substantial  adverse  consequences  to the Company.  In connection  with his
retention,  however, the Board of Directors revoked all of his check-signing and
related financial authority.

Conclusion of Investigation

         On February 17, 1998, the Board of Directors  approved the  replacement
of  Scheifley  as the  independent  accountant  chosen  to audit  the  Company's
financial  statements  and approved the  appointment  of Cherry,  Bekaert as the
Company's  independent  accountant  for the 1997  fiscal  year.  The 


                                      -11-
<PAGE>

Company has previously  disclosed the appointment to the Commission on a Current
Report on Form 8-K dated  February  17,  1998.  Cherry,  Bekaert is the  largest
regional CPA firm in the  southeast,  with over 300 people in 23 offices.  It is
headquartered in Richmond, Virginia.

         By the end of February 1998, Cherry,  Bekaert had concluded much of the
investigation of  management-related  defalcations,  and, by March 18, 1998, had
completed  most  follow-up  tasks in  conjunction  with  the  1997  audit of the
Company. Having performed investigatory procedures on relevant available records
from August 1992 through January 1998, Cherry,  Bekaert found diversion of funds
in two areas -  unauthorized  advances and personal  credit card charges paid by
the Company.  The  following  table  presents  the results of Cherry,  Bekaert's
investigation,  net  of all  repayments  through  January  1998,  by  the  named
individuals, excluding accrued interest:

<TABLE>
<CAPTION>

                                      Unauthorized       Personal Charges to
           Officer/Director             Advances              Credit Card              Total
           ----------------             --------              -----------              -----

<S>                                    <C>                   <C>                    <C>         
           Irvine R. Spurlock          $  73,075.86          $    8,176.03          $  81,251.89

           H. Norman Spurlock, Jr.     $ 112,401.78          $  154,779.37          $ 267,181.15
</TABLE>


Advances  and loans to Harold N.  Spurlock,  Sr. and Irvine  Spurlock  were also
evaluated.  Nothing was noted that required  additional  investigation.  Cherry,
Bekaert  found no  evidence  that either Mr.  Sumpter or Harold  Spurlock or any
corporate  officer or director other than Norman  Spurlock,  Irvine  Spurlock or
Warren Beam was involved in any misuse of the Company's funds.

         The SLC Supplement  reported that Cherry,  Bekaert's  investigation had
revealed   that  the   diversion  of  corporate   funds  was  concealed  by  the
falsification  of records and collusion and that the discovery of such diversion
by the Company's auditors and management would have been difficult. Further, the
SLC Supplement  reported that the unauthorized  advances to Norman Spurlock were
hidden by false workpapers  prepared by Mr. Beam and furnished to Scheifley,  as
well as the  collusion  of Norman  Spurlock  and Mr.  Beam.  Pursuant to Cherry,
Bekaert's investigation, these workpapers presented only those loans to officers
that had been approved by the Board of Directors, together with a complex series
of entries  indicating  that such loans were being repaid,  when, in fact,  they
were not.

         According to the SLC Supplement,  with respect to the personal  charges
on the  Company's  credit  card,  Norman  Spurlock  was the officer who approved
travel and entertainment expenses for all employees.  Cherry, Bekaert discovered
that these charges were allocated to various expense  accounts in different cost
centers, at Norman Spurlock's direction,  by Catharine Spurlock,  who issued the
checks for approved expenses.  Cherry,  Bekaert believes that Catharine Spurlock
did not see the details of the credit card bills, which were allocated over many
general ledger accounts.  Mr. Beam was the individual ultimately responsible for
posting these expenses. Based on Cherry,  Bekaert's  investigation,  the Special
Litigation  Committee  could not  confirm  whether or not Mr.  Beam was aware of
Norman Spurlock's credit card abuse, but it appeared that the combination of the
amounts  involved and the wide array of ledger  accounts  should have led to Mr.
Beam's  discovery of these  abuses.  According to the SLC  Supplement,  Mr. Beam
colluded with Norman Spurlock in the diversion of corporate funds, but there was
no indication that Mr. Beam personally received any such funds.

         Furthermore,  the SLC Supplement concluded,  based on Cherry, Bekaert's
investigation,  that  Irvine  Spurlock  diverted  corporate  funds by having the
Company purchase boat motors and charging the amounts to another capital item of
the  Company  (forklifts).  Catharine  Spurlock  issued two of the three  checks
involved,  totaling  $25,000.  While  the  Special  Litigation  Committee  found
indications  that she knew  what the  checks  were  for,  as the payee was not a
vendor  of the  Company,  Cherry,  Bekaert  found  no  evidence  of any  further
wrongdoing by Catharine Spurlock. Ms. Spurlock was relieved of any check writing
and related  financial  authority,  and is being  reassigned  from the Company's
corporate  offices  to a  non-financial  administrative  assistant  position  in
Spurlock Adhesives' manufacturing plant, located in 


                                      -12-
<PAGE>


Waverly, Virginia.  According to the SLC Supplement, the personal charges to the
Company's  credit card by Irvine Spurlock,  amounting to  approximately  $8,200,
were in numerous travel and entertainment accounts.

Restitution by Officers and Directors

         Upon disclosing on February 8, 1998 the  unauthorized  advances paid to
him,  Irvine Spurlock paid the Company  $73,075.86 as restitution.  By March 18,
1998,  Irvine  Spurlock had paid  $28,867.83 as additional  restitution  for the
$8,176.03 in personal  charges to the Company's credit card, and interest at the
Company's  borrowing  rate  accrued on the  unauthorized  advances  and personal
charges.  Irvine  Spurlock also  provided an additional  $1,000 to help defray a
portion of the estimated legal expenses incurred by the Company.

         The Special  Litigation  Committee was informed,  however,  that Norman
Spurlock   probably  was   financially   incapable  of  making   immediate  full
restitution.  In a  settlement  between the Company and Norman  Spurlock,  dated
April 8, 1998,  Norman  Spurlock  agreed to restitution of $385,000,  $10,000 of
which  has been  repaid to  Spurlock  Adhesives.  As a part of such  settlement,
Spurlock  Family  Partnership,  which holds the shares of the  Company's  common
stock owned by Harold,  Irvine and Norman  Spurlock,  has delivered a promissory
note for $375,000,  approximately $50,000 of which represents legal and auditing
costs  associated  with the  investigation.  Payments on the promissory  note of
interest only are due monthly,  at 9% per annum,  for three years with a balloon
payment for the full amount at the end of the three years.  The promissory  note
is secured by 2,325,000  unencumbered shares of common stock of the Company held
by the  Partnership  and is  personally  guaranteed by Harold  Spurlock.  Norman
Spurlock has also confessed  judgment for $375,000 docketed in the Circuit Court
of Sussex County, Virginia,  which, under the terms of the settlement,  will not
be enforced or domesticated in other jurisdictions by Spurlock Adhesives so long
as the promissory note is paid as agreed.

         In response to the events  described above, the Audit Committee and the
Company  have  taken  immediate  action to  strengthen  the  Company's  internal
accounting  controls.  Immediately  following  the discovery of the diversion of
corporate  funds,  the Company  obtained  the  resignations  of the two officers
(Norman  Spurlock and Warren Beam) and the two  directors  (Norman  Spurlock and
Irvine Spurlock) involved in such diversion.  In addition,  all expense reports,
including both reimbursements for expenses and employee advances of salary, were
submitted to Mr. Sumpter for approval. Furthermore, the Company has prepared and
implemented  formal procedures with respect to the review and approval of travel
and related expense reimbursement requests.  Specifically, all such requests are
now forwarded to Lawrence C. Birkholz, the Company's Controller,  for review and
then to Mr.  Sumpter for approval.  In addition,  no advances may be made to any
officers of the Company without satisfactory  business  justification.  Finally,
the Company has changed and limited the signatories on its checking accounts.

Supplemental Report of Special Litigation Committee

         On April 13,  1998,  the Special  Litigation  Committee  filed with the
District Court a supplement to the report that it had filed in October 1997. The
SLC Supplement  presented to the District  Court the  conclusions of the Special
Litigation  Committee  as to whether  or not  maintenance  of the  shareholders'
derivative  suit is in the best  interests of the Company in light of the events
described above.  First, the Committee stated that the SLC Supplement  addressed
only  Claim  Three  of  the  plaintiffs'  complaint,   which  generally  alleged
unauthorized  loans to directors and  officers.  The  Committee  reiterated  its
conclusions  and  recommendations  regarding  all claims  other than Claim Three
stated in its original report, i.e., that pursuit of such claims would not be in
the best interests of the shareholders of the Company.

         Second,  the Special  Litigation  Committee  concluded  that pursuit of
Claim  Three was not in the best  interests  of the  Company  given that (i) the
Company has received  restitution  from Irvine  Spurlock  and a legally  binding
restitution  agreement  from  Norman  Spurlock,  (ii)  the  Company  immediately
implemented  major  changes in  management,  including the  resignations  of two
officers  (Norman  Spurlock 


                                      -13-
<PAGE>

and  Warren  Beam) and two  directors  (Norman  Spurlock  and  Irvine  Spurlock)
involved  in the  diversion  of  corporate  funds,  and  (iii) the  Company  has
implemented  changes in internal  controls to guard against future  diversion of
corporate funds. The Special  Litigation  Committee further  identified  certain
risks to the Company if the shareholders' derivative suit were maintained.  As a
small company with limited resources,  the Company is subject to a high level of
scrutiny by, for example,  prospective  business  partners and lenders and could
experience  loss  of  corporate  opportunities.   In  addition  to  these  risks
identified  by  the  Special  Litigation  Committee,  management  believes  that
continuation  of the  lawsuit  would  result  in  the  Company's  incurrence  of
additional  legal  and  related  expenses,  which  could  adversely  affect  the
profitability  of the Company,  and would provide  distractions  to management's
day-to-day operations of the Company.


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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year covered by this report.


                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters

         Market  Information.  There is no established public trading market for
the Common  Stock of the  Company.  The  following  table shows high and low bid
prices  reported in the National Daily  Quotation  Sheets,  which are quotations
between  dealers  without   adjustment  for  retail   markups,   markdowns,   or
commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>

                                                            Bid Price
                                                       High            Low
                                                       ----            ---
Fiscal Year Ended December 31, 1996

<S>                                                 <C>              <C>     
     First Quarter..............................    $  1.0625        $  .3125
     Second Quarter.............................       1.4375             .25
     Third Quarter..............................        1.125             .50
     Fourth Quarter.............................          .75            .375

Fiscal Year Ended December 31, 1997

     First Quarter..............................       $ .625          $ .375
     Second Quarter.............................        .4375            .375
     Third Quarter..............................          .38            .375
     Fourth Quarter.............................          .45             .38

</TABLE>

         Approximate Number of Holders of Common Stock. The number of holders of
record of the  Company's  Common Stock,  no par value,  on December 31, 1997 was
approximately 227.

         Dividends.  Holders  of the  Company's  Common  Stock are  entitled  to
receive  such  dividends as may be declared by its Board of  Directors.  No cash
dividends  have been paid with  respect  to the  Company's  Common  Stock and no
dividends are anticipated to be paid in the foreseeable future.

         Sale of Unregistered Securities.  The Company sold no equity securities
of the Company which were not  registered  under the  Securities Act of 1933, as
amended, during the period covered by this report.

                                      -14-
<PAGE>


Item 6.           Selected Financial Data

         The information set forth below should be read in conjunction with Item
7, "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.

         The selected  consolidated  financial  information presented below for,
and as of the end of, each of the years in the five-year  period ended  December
31, 1997, is derived from the consolidated  financial statements of the Company.
The  financial  statements  as of  December  31,  1997,  and for the year  ended
December  31,  1997,  have been  audited by Cherry,  Bekaert & Holland,  L.L.P.,
independent auditors. The financial statements for the four years ended December
31, 1996, have been audited by James E. Scheifley & Associates,  P.C.  (formerly
Winter, Scheifley & Associates, P.C.), independent auditors.

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                        ------------------------------------------------------------------------------
                                            1997             1996           1995 (1)         1994           1993
                                            ----             ----           ----             ----           ----
Income Statement Data:

<S>                                       <C>               <C>             <C>            <C>            <C>        
Net Sales...........................      $24,725,077       $28,643,415     $33,243,677    $30,512,704    $23,475,249
Cost of sales.......................       19,597,991        21,129,265      26,092,053     26,269,016     20,268,532

Gross profit........................        5,127,086         7,514,150       7,151,624      4,243,688      3,206,717
Selling,  general  and  administrative      4,815,638         4,414,422       3,903,371      3,456,356      3,808,775
                                            ---------         ---------       ---------      ---------      ---------
expenses............................
Income (Loss) from operations.......          311,448         3,099,728       3,248,253        787,332      (602,058)

Other income and expenses...........                -                 -               -              -      (427,508)
Interest income.....................          139,307            83,376          12,007          2,513         12,849
Interest expense....................        (627,799)         (667,942)       (663,662)      (828,261)      (668,670)
                                            ---------         ---------       ---------      ---------      ---------
Income    (Loss)    from    continuing      (177,044)         2,515,162       2,596,598       (38,416)    (1,685,387)
operations..........................
Provision for income taxes (benefit)        (152,304)         1,021,487         115,600              -              -
                                            ---------         ---------       ---------      ---------      ---------
Net Income (Loss)...................         (24,740)         1,493,675       2,480,998       (38,416)    (1,685,387)
                                        =============         =========       =========  ===  ========    ===========
Net Income (Loss) per common share:
   From continuing operations.......            $0.00             $0.22           $0.37        ($0.01)        ($0.42)
                                                -----             -----           -----        -------        -------
</TABLE>


<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                        -----------------------------------------------------------------------------
                                            1997            1996            1995           1994            1993
                                            ----            ----            ----           ----            ----
<S>                                         <C>            <C>             <C>            <C>             <C>       
Balance Sheet Data:

Current assets......................        2,726,167      $2,288,914      $3,099,414     $3,715,917      $1,748,663
Current liabilities.................        5,365,116       4,388,860       5,330,308      8,133,204       5,978,068
Total assets........................       19,401,431      12,270,407       9,342,968      9,996,870       8,305,184
Long-term debt......................        9,598,315       3,402,621         983,652      1,354,556       1,779,592
Stockholders' equity(2).............        4,268,043       4,292,783       2,919,108        509,110         547,524

Number of common shareholders.......              227             242             249            245             240

Weighted   average  number  of  common
shares                                      6,573,639       6,711,733       6,717,667      4,266,066       3,999,566
   outstanding......................
Cash dividends declared ............                0               0               0              0               0
Book value per share (3)............            $0.66           $0.64           $0.43          $0.08           $0.08
</TABLE>

 (1) Assumes the conversion of 1,200,000  preferred shares into 2,400,000 common
     shares,  which  conversion  was  subsequently  effected on January 5, 1996.
     Absent the pro forma addition of 2,400,000  common  shares,  the historical
     number of weighted  average  shares  outstanding  for the fiscal year ended
     December 31, 1995 was 4,317,667.
(2)  For the three fiscal years ended  December  31, 1995,  stockholders  equity
     included  1,200,000  shares of  preferred  stock,  par value $2 per  share,
     totaling $2,400,000.
(3)  Assuming the conversion of 1,200,000 preferred shares into 2,400,000 common
     shares, which conversion was subsequently  effected on January 5, 1996, the
     weighted  average  shares  outstanding  for the five  fiscal  years  ending
     December 31, 1997 were:  6,573,639,  6,711,733,  6,717,667,  6,626,066  and
     6,399,566.


                                      -15-
<PAGE>

Item 7.           Management's Discussion and Analysis of Financial Condition 
                  and Results of Operations

         The  following  discussion  and  analysis  provides  information  which
management  believes is relevant to understanding  the Company's  operations and
financial  condition.  This  discussion  should be read in conjunction  with the
financial  statements and accompanying  notes.  The financial  statements of the
Company have been  prepared in conformity  with  generally  accepted  accounting
principles.

Forward-Looking Statements

         The following discussion contains certain  forward-looking  statements,
generally  identified  by phrases such as "the Company  expects" or  "Management
believes" or words of similar effect. The Company wishes to caution readers that
certain  important  factors set forth within such discussion,  among others,  in
some cases have affected,  and in the future could affect,  the Company's actual
results  and could  cause the  Company's  actual  results for 1997 and beyond to
differ  materially from those expressed in any  forward-looking  statements made
herein. For a further discussion of such factors and forward-looking statements,
please see "Forward-Looking and Cautionary Statements" below.

General

         Overview. The Company's operating results declined substantially in the
fiscal year ended December 31, 1997 primarily due to a significant  reduction in
the gross margin, which reduction was caused by price deterioration  relating to
oversupplies  of the Company's  primary  products in two of its three regions of
operation.  Also,  during  1997 the  Company  elected to  expense  approximately
$533,927 of startup and pre-operating costs relating to the new Moreau, New York
manufacturing  facility,  which is scheduled  to come on line in mid-1998.  As a
result,  the Company  experienced  a loss of ($24,740) in 1997,  compared to net
income of $1,493,675 and $2,480,998 in 1996 and 1995,  respectively.  Management
attributed  the record 1995 profits  primarily to a refocusing by the Company on
its core  resin/adhesives  business and the  termination of  non-profitable  gas
generation  operations  and  increased  control  over raw  materials  prices and
improved  product  margins.  The lower net profit in 1996 was largely due to the
effect of income taxes, as loss  carry/forwards  were substantially  utilized in
1995.

         Dependence on Construction and Related Industries.  Demand for Spurlock
Industries' products and the Company's financial performance are closely tied to
the fortunes of construction,  forest products and related industries. See "Item
1. Business - Seasonality and Backlog."

         Price of Raw Materials.  Raw materials  costs  comprised  approximately
60%,  57% and 62% of net  sales  in  1997,  1996  and  1995,  respectively.  Raw
materials are by far the largest component of cost of goods sold. Therefore, the
Company's operating performance is sensitive to price movements in its basic raw
materials,  particularly  methanol and urea.  Management  strives to  ameliorate
these commodity risks by maintaining diverse supply relationships and by closely
matching increases and decreases in product prices to increases and decreases in
raw material costs. This was not possible during 1997, as product prices dropped
in the face of generally stable raw material prices throughout much of the year.
Both methanol and urea prices  started to decline in the fourth  quarter,  which
decline  continued  into the first  quarter  of 1998,  resulting  in even  lower
selling  prices  for  the  Company's  products.  Management  believes  that  raw
materials  prices may  decline  further in 1998,  then expect them to firm up as
some production facilities for such raw materials are taken off-line.  See "Item
1.
Business - Raw Materials and Suppliers."

         Freight Costs. A substantial portion of Spurlock  Industries'  products
are priced on an "as delivered  basis." For 1997, 1996, and 1995,  freight costs
relating to delivery of the Company's  products  comprised  approximately  3.6%,
3.9%, and 4.2%, respectively, of net sales. Accordingly, the Company's operating
performance is sensitive to movements in freight costs.

         New Credit Facilities.  In July 1996, in order to reduce interest costs
and increase credit  availability,  the Company  terminated a $3,500,000 line of
credit with its primary  working capital lender and obtained a line of credit in
a like amount with a new lender. Such new credit facility is secured by accounts
receivable  and  inventory,   among  other  assets,   and  provides  for  credit
availability  based upon the level of  accounts  receivable  and  inventory.  In
conjunction  with this new line of credit,  the Company  borrowed an  additional
$3,600,000 under a term loan to purchase a formerly leased  formaldehyde  plant,
which term loan is secured by all assets.

         New York Project.  In the fourth quarter of 1996, the Company purchased
property in the Moreau Industrial Park,  located in South Glens Falls, New York,
obtained the necessary  regulatory  approvals and  initiated  construction  of a
manufacturing  facility  for the  production  of  formaldehyde  and resins.  The
facility consists of two formaldehyde plants (one purchased and one leased), one
resin  plant  and  ancillary  equipment,  buildings  and tank  farms.  The total
estimated cost of the project is $8,300,000 for the purchased plants,  excluding
soft costs such as interest,  environmental permits and legal and administrative
expenses.  D.B. Western,  Inc. is the general contractor of the project and owns
the leased  formaldehyde  plant.  Payments under the lease are $46,139 per month
over a ten-year  term,  with a purchase  option at the end of three  years.  The
financing  sources for the purchased  plants include a term loan for $1,500,000,
amortized  for 10 years at an interest  rate of LIBOR plus 2.75%,  the  proceeds
from a tax-exempt  bond in the amount of $6,000,000  issued by Saratoga  County,
New York,  amortized  for 10 years at a fixed  interest  rate of 4.74%,  and the
Company's  operating cash flow for the remaining $800,000 and the soft costs. As
of December  31,  1997,  the  unexpended  bond fund  balance  was  approximately
$3,890,000. Management believes that construction is proceeding on schedule, and
the Moreau facility is expected to begin operations in mid-1998.

         Write Off of Start-up  Costs.  In 1997, the Company  elected to expense
certain start-up and pre-operating  costs relating to the New York manufacturing
facility.  Such costs aggregated  $533,927.  The American Institute of Certified
Public Accountants ("AICPA") Accounting Standards Executive Committee (AsSEC) is
anticipated  to require the  expensing of all start-up and  pre-operating  costs
effective with years  starting after December 15, 1997.  While the Company could
elect to capitalize  these costs for the New York facility,  it seems reasonable
that  implementation of the requirement will take place. The Company has elected
the most conservative treatment, under the circumstances.

         Purchase  of Waverly  Formaldehyde  Plant.  In July 1996,  the  Company
consummated an agreement with D. B. Western,  Inc. whereby the Company purchased
a formaldehyde  plant located in Waverly,  Virginia  formerly  leased from D. B.
Western,  Inc. Such agreement  terminated the lease and settled all  operational
performance and rent disputes with respect to the facility for $3,675,000.

         Compliance with Environmental Regulations.  Environmental costs charged
to  operations  aggregated  $184,259,  $202,076 and $277,349 for the years ended
December 31, 1997,  1996 and 1995,  respectively.  As a percentage of net sales,
such  expenditures  totaled .75%,  .71% and .83%,  respectively  over such three
years. In such years,  over 80% of such  expenditures  related to testing at the
Company's manufacturing  facilities to ensure compliance with environmental laws
and  regulations.   Other  expenditures  included  obtaining  required  permits,
purchase  and  maintenance  of safety  equipment,  trash and waste  removal  and
training.  All such expenses are viewed by the Company as  customary,  recurring
costs of doing business in its particular industry.

         Capacity Utilization. In 1997, the Waverly, Virginia formaldehyde plant
ran at approximately 83% of capacity as compared to 83% in 1996 and 85% in 1995.
The Malvern,  Arkansas  formaldehyde  plant ran at approximately 67% in 1997, as
compared to 84% and 90% in 1996 and 1995, respectively.  The decrease was due to
an oversupply of  formaldehyde  in the regional  market served by such plant. In
1997, resin capacity utilization at the Waverly facility was 53% compared to 55%
and  60% in  1996  and  1995,  respectively.  With  respect  to  resin  capacity
utilization,  the Malvern facility  produced at a 52% utilization rate for 1997,
compared  to 65% for both 1996 and  1995.  The  decline  at  Malvern  was due to
regional oversupplies of product.

         Inflation.  Although Spurlock Industries'  operations are influenced by
general  economic  trends,  the Company  does not believe that  inflation  had a
material  impact on its operations  during the three-year  period ended December
31, 1997.

Results of Operations

         Fiscal 1997 Compared to 1996.  Spurlock  Industries'  net sales for the
year ended December 31, 1997 were  $24,725,077,  a decrease of 13.7% compared to
$28,643,415 in 1996. This decrease resulted from lower average selling prices on
Spurlock  Adhesives'  resin and  formaldehyde  products due to an  oversupply of
product  in  two  of  the  Company's  operating  regions.  Such  oversupply  was
particularly  acute in the  region  served by the  Company's  Malvern,  Arkansas
facility.  Also, although production volume for formaldehyde remained relatively
stable in 1997 at 71,051,940  pounds as compared to  72,211,660  in 1996,  resin
shipments declined 14.4% to 151,742,035 pounds,  primarily due to reduced volume
sales from the  Malvern  plant.  All sales in 1997 were  generated  by  Spurlock
Adhesives.

         Cost of goods sold for 1997 totaled  $19,597,991 or 79.3% of net sales,
compared to  $21,129,265 or 73.8% of net sales in fiscal 1996.  This  translated
into a decrease  in the  Company's  gross  margin to 20.7% in 1997 from 26.2% in
1996.  Such margin  deterioration  resulted  from the above  described  downward
pressure  on  prices  exerted  by  customers   purchasing  in  the  competitive,
oversupplied  regional  markets  served by the  Company's  two existing  plants.
Management   believes  that  the  extremely   competitive   pricing  environment
experienced in 1997 will continue through 1998, but that  formaldehyde and resin
prices  will  begin to firm up in the  Malvern  and  Waverly  markets as current
overcapacity is eliminated. However, management believes that the markets served
by the New  York  facility  to be  completed  in  mid-1998  will  be  much  more
favorable, due to industry under-capacity in that region.

         Selling,  general and  administrative  expenses  totaled  $4,815,638 or
19.5% of net sales in 1997, versus $4,414,422 or 15.4% of net sales in 1996. The
$401,216  increase  in these  expenses  was due  primarily  to the  write off of
start-up and  pre-operating  costs of the Moreau,  New York project  aggregating
$533,927. Excluding such start-up and related expenses, in 1997 selling, general
and  administrative  expenses fell by $132,711.  Due to the  contraction  in net
sales, however,  selling,  general and administrative  expenses increased,  as a
percent of net sales, from 15.4% in 1996 to 19.5% in 1997.

         Interest expense (which excludes  interest on debt obligations  related
to the New York  Project,  which is  capitalized)  declined  6.0% in 1997.  Such
decline resulted  primarily from lower average  outstandings under the Company's
working capital facility,  which resulted in turn from reduced sales and working
capital requirements.

         The  Company   reported  a  pre-tax  loss  of  ($177,044)  in  1997,  a
significant  decline from $2,515,162 in pre-tax profits reported in the previous
year.  The 1997 loss reflects  primarily the decline in the gross margin and the
write-off  of  start-up  and  pre-operating  costs for the  Moreau  project,  as
described above.

         The  Company  utilized  tax  benefits   totalling   $152,304  in  1997,
consisting of differences  between the accelerated  methods of depreciation  for
income tax purposes and the deferred tax assets  created by the post  retirement
funding and the net operating  loss  carryforward  resulting  from the operating
loss in 1997.  The  provision for income tax in 1996 totaled  $1,021,487,  which
consisted of $149,415 in state income tax and $846,091 in federal income tax.

         The Company  reported a net loss in 1997 of  ($24,740),  a  significant
decline from net income of $1,493,675 reported in the prior year.

         Fiscal 1996 Compared to 1995.  Spurlock  Industries'  net sales for the
year ended December 31, 1996 were  $28,643,415,  a decrease of 13.8% compared to
$33,243,677 in 1995. This decrease resulted from lower average selling prices on
all of Spurlock  Adhesives'  resin and  formaldehyde  products due to: (i) lower
prices for raw materials,  and (ii) several customers'  decreased demand for the
Company's  products due to a change to a more efficient  manufacturing  process.
Shipments of resin/adhesive  products - which comprised approximately 67% of all
1996 shipments - declined by 4.3% from 1995. All sales in 1996 were generated by
Spurlock Adhesives.

         Cost of goods sold for 1996 totaled  $21,129,265  or 73.8% of net sales
versus  $26,092,053  or 78.5% in 1995.  The  decrease was mainly in raw material
costs  which  represented  57.1%  of net  sales  in 1996  versus  62.4% in 1995.
Management  was  successful  in holding most  categories of other costs of goods
sold to 1995 levels.  Accordingly,  the gross  margin  improved in 1996 to 26.2%
from 21.5% in 1995, on gross profit of $7,514,150 versus $7,151,624 in 1995.

         Selling,  general and  administrative  expenses  totaled  $4,414,422 or
15.41%  of net sales in 1996 as  compared  to  $3,903,371  or 11.74% of sales in
1995. The dollar increase in this category in 1996 resulted from salary and wage
increases to middle  management and increased  professional fees associated with
the  merger  that  took  place  July 26,  1996.  The  lower  volume of net sales
significantly contributed to the increase as a percentage of net sales.

         Interest  expense in 1996,  although  increasing as a percentage of net
sales to 2.33%  from  2.00% in 1995,  increased  only .6% in  absolute  terms to
$667,942  from  $663,662  in 1995.  This  increase  resulted  from the term loan
borrowing for the purchase of the leased  formaldehyde  plant and lower interest
rates on the line of credit.

         Pretax  earnings  in  1996 of  $2,515,162  substantially  mirrored  the
$2,596,598 reported in 1995, despite lower sales. This was due to an improvement
in the pretax margin, which was 8.7% in 1996 versus 7.8% in 1995.

         The provision for income taxes totaled  $1,021,487 for 1996 as compared
to $115,600 for 1995. The provision for income tax in 1996 consisted of $149,415
in state income tax and $846,091 in federal  income tax, as compared to $104,000
and  $11,400,  respectively,  for  1995.  The  1995  figures  are  net  of  loss
carryforwards  aggregating  $801,532.  Absent such  carryforwards  in 1996,  net
earnings after taxes for 1996 of $1,493,675 declined from $2,480,998 in 1995.

Liquidity and Capital Resources

         General.  For  many  years,  the  Company  has  relied  heavily  on its
institutional  working  capital  lenders and its trade  creditors to finance its
working  capital  requirements.  The Company  traditionally  has  operated,  and
continues to operate,  with a negative  working  capital  position,  as Spurlock
Industries  takes advantage of supplier payment terms which exceed those granted
to the Company's customers.

         Cash Flow. In 1997,  Spurlock  Industries reported a cash flow from net
income (loss) and depreciation and amortization of $948,837, which represented a
significant  reduction  from  the  $2,244,732  reported  in  1996.  The  Company
supplemented  such cash flow with a  $224,653  reduction  in trade  receivables,
reflecting  lower net sales,  and an $805,337  increase in accounts  payable and
accrued  expenses.  Working  capital  decreased by $619,003 to  ($2,718,949)  at
December  31, 1997.  Net cash  provided by operating  activities  of  $1,700,697
effectively  permitted  the  Company  to repay  notes and loans in the amount of
$1,133,388 and increase other assets(which represent deferred IRB financing fees
aggregating  $492,423) by $503,539.  New  borrowings of $7,500,000  funded fixed
asset additions of $3,488,587 and restricted cash of $3,889,567. Such restricted
cash represents  proceeds of the New York industrial  development bond financing
which are being held in escrow pending disbursement for project costs.  Overall,
cash and cash equivalents at the end of 1997 increased by $256,613 to $362,685.

         In 1996,  Spurlock  Industries reported a cash flow from net income and
depreciation and amortization of $2,244,732  compared to the $3,181,238 reported
in 1995. This cash flow, supplemented by reductions in receivables and inventory
of $420,306 and $54,133, respectively,  permitted the Company to reduce accounts
payable by $380,584,  fund fixed asset  additions of $1,184,369 and reduce notes
and loans by $1,351,511.  Working capital  increased  $130,948 or  approximately
5.9% to ($2,099,946) from ($2,230,894) in 1995.

         Credit  Facility.  As described above, in July 1996 the Company entered
into  a new  $3,500,000  revolving  credit  facility  with a new  lender,  which
facility  matures in July 1999.  Outstanding  loans under the  facility  totaled
$1,341,622  and  $1,420,801 at December 31, 1997 and 1996,  respectively,  which
were  substantially the total amounts available at such times based on levels of
accounts receivable and inventory on which borrowing  availability is based. The
credit  facility  provides the Company with an important  source of liquidity in
addition to its cash  account and cash  generated  from  operations.  Management
believes  that  this  credit  facility  and  internally  generated  cash will be
sufficient to fund the Company's working capital needs in 1998.

         The credit  facility  contains a number of  financial  and  restrictive
covenants  limiting,  among other things,  the redemption of capital stock,  the
payment of dividends, the incurrence of additional indebtedness, certain mergers
and  acquisitions,  and  the  acquisition  of  fixed  assets,  as  well  as  the
maintenance of certain financial ratios.  During 1997,  technical  violations of
certain of such  covenants  resulted,  for which the  Company has  received,  or
expects shortly to receive, a waiver from the lender.

<PAGE>

         Long Term Debt. In addition to its working capital credit facility, the
Company had  outstanding  at year end 1997 long term debt  totalling  $9,598,315
(excluding  current maturities of $1,279,188),  a substantial  increase from the
$3,402,621 (excluding current maturities of $1,029,090)  outstanding at year end
1996. Such increase relates to borrowings  totalling  $7,500,000 relating to the
Moreau, New York project,  consisting of a term loan in the amount of $1,500,000
and a $6,000,000  industrial revenue bond, described above. In 1996, the Company
entered  into a term loan in the  amount of  $3,639,000  with a bank in order to
purchase a formerly leased formaldehyde plant. Outstandings under such term loan
totaled  $2,830,328 at year end 1997.  Primarily as a result of the  significant
increase in funded debt by the Company in 1997,  the ratio of total  liabilities
to total net worth,  a measure of  leverage,  increased at year end 1997 to 3.55
from 1.86 at year end 1996.

         Moreau  Facility.  As described  above, the total estimated cost of the
New York project is $8,300,000  for the purchased  plants,  excluding soft costs
such as interest,  environmental  permits and legal and administrative  expenses
estimated at  $600,000.  D.B.  Western,  Inc. is the general  contractor  of the
project and owns the leased  formaldehyde  plant.  Payments under the `lease are
$46,139  per month over a 10-year  term,  with a  purchase  option at the end of
three years.  The financing  sources for the purchased plant include a term loan
for $1,500,000, amortized over 10 years at an interest rate of LIBOR plus 2.75%,
the  proceeds  from a tax  exempt  bond in the  amount of  $6,000,000  issued by
Saratoga  County,  New York,  amortized for 10 years at a fixed interest rate of
4.74%, and the Company's  operating cash flow for the remaining $800,000 and the
soft costs.  As of December  31,  1997,  the  unexpended  bond fund  balance was
approximately  $3,890,000.  Management believes that the above-described sources
of  funds  shall be  adequate  to fully  fund the  project,  as well as meet any
additional long term funding needs, in 1998.

Emerging Issues

         Many existing  computer programs use only two digits to identify a year
in  the  date  field.   These  programs  were  designed  and  developed  without
considering the impact of the upcoming change in the century.  If not corrected,
many computer  applications  could fail or create erroneous results by or in the
year 2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000  issue")  will  depend on a number of  factors,  including
their software and hardware and the nature of their  industries.  Companies must
also  coordinate  with other entities with which they  electronically  interact,
both  domestically  and globally,  including  suppliers,  customers,  creditors,
borrowers and financial service organizations.

         The Company has closely  examined the Year 2000 issue and the potential
costs and  consequences  to the Company in addressing  this issue. As a periodic
improvement  to its  day-to-day  operations,  the  Company is  currently  in the
process of upgrading its computer systems,  including the software  necessary to
maintain   inventory   controls,   all  of  which  are  "Year  2000"  compliant.
Implementation  of these  systems is expected to be completed by December  1998.
Management  estimates that the Company's investment in hardware and software for
this upgrade will total approximately $20,000 over the next seven months.

         The Company is further  communicating  with third parties with which it
does business to coordinate  further action with respect to the Year 2000 issue.
The Company has recognized,  in 


                                      -16-
<PAGE>

particular,  that the Year 2000 issue may affect  machinery and other  equipment
that use processing chips. The Company has received preliminary indications from
the  manufacturers  of its equipment  that the equipment at issue is "Year 2000"
compliant  and  will  continue  to  maintain  communications  relating  to  such
compliance.  As a result,  management  believes that, with the implementation of
the systems as  described  above,  the Year 2000 issue is not expected to have a
material  impact on the Company's  operations and that the cost of the Company's
addressing the Year 2000 issue is not a material event or uncertainty that would
cause its reported  financial  information  not to be necessarily  indicative of
future operating results or financial condition.

Forward-Looking and Cautionary Statements

         The Company and its  representatives may from time to time make written
or  oral  forward-looking  statements,  including  statements  contained  in the
Company's filings with the Securities and Exchange  Commission in its reports to
shareholders.  In connection  with the "safe  harbor"  provisions of the Private
Securities  Litigation  Reform Act of 1995,  the  Company is hereby  identifying
important  factors that could cause  actual  results to differ  materially  from
those  contained in any  forward-looking  statement  made by or on behalf of the
Company.  Any  such  statement  is  qualified  by  reference  to  the  following
cautionary statements.

         The Company's  formaldehyde  and resin  business is closely tied to the
construction and forest products industries, and is influenced by housing starts
and construction  activity  generally.  The Company's  operating  performance is
sensitive to price movements in its basic raw materials,  particularly  methanol
and urea. The Company's operating  performance is also sensitive to movements in
freight costs. The Company's raw materials, products and manufacturing processes
are  subject to  environmental  laws and  regulations  and the costs  associated
therewith. The availability of credit from institutional asset based lenders and
suppliers is very important to the Company.  Developments in any of these areas,
which are more fully described elsewhere in Parts I and II hereof, each of which
is  incorporated  into this  section by  reference,  could  cause the  Company's
results to differ materially from the results that have been or may be projected
by or on behalf of the Company.  The Company cautions that the foregoing list of
important factors is not exclusive. The Company does not undertake to update any
forward-looking  statement that may be made from time to time by or on behalf of
the Company.


Item 7A.          Quantitative and Qualitative Disclosures About Market Risk

         The Company's market  capitalization  on January 28, 1997 was less than
$2.5 billion,  and therefore,  pursuant to General  Instruction 1 to Item 305 of
Regulation S-K, the information otherwise required by this Item 7A. has not been
included in this report.



                                      -17-
<PAGE>

Item 8.           Financial Statements and Supplementary Data



                          Independent Auditors' Report



Board of Directors and
   Shareholders
Spurlock Industries, Inc.
  and Subsidiary
Waverly, Virginia


We  have  audited  the  accompanying  consolidated  balance  sheet  of  Spurlock
Industries,  Inc.  as  of  December  31,  1997,  and  the  related  consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

We conducted our audit 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  by
management,  as well as evaluating the overall financial statement presentation.
We believe that 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 Spurlock Industries,
Inc. as of December 31, 1997,  and the results of its  operations,  and its cash
flows for the year then ended, in conformity with generally accepted  accounting
principles.




/s/ Cherry, Bekaert & Holland L.L.P.

Richmond, Virginia
March 13, 1998

April 10, 1998 (with respect to Note 2)

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Spurlock Industries, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Spurlock
Industries, Inc. as of December 31, 1996 and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the two years in
the  period  ended  December  31,  1996.  These  financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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  by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Spurlock Industries, Inc. as of
December 31, 1996 and the results of its operations, and its cash flows for each
of the two years in the period  ended  December  31, 1996,  in  conformity  with
generally accepted accounting principles.


                                    /s/ Winter, Scheifley & Associates, P.C.
                                    Winter, Scheifley & Associates, P.C.
                                          Certified Public Accountants


Englewood, Colorado
January 17, 1997
(Except for Note 2, for which
the date is March 13, 1998.)


<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Balance Sheets

December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets
                                                                    1997                  1996
                                                                -------------         -------------
<S>                                                             <C>                   <C>      
Current assets
        Cash and cash equivalents                               $     362,685         $    106,072
        Accounts receivable, trade, net                             1,222,277            1,446,930
        Other accounts receivable                                           -                8,718
        State income tax receivable                                    40,713                    -
        Federal income tax receivable                                 151,000                    -
        Accounts and notes receivable
            - officers current portion                                101,944               38,595
        Inventories                                                   530,183              541,632
        Deferred tax asset                                             92,908                    -
        Prepaid income taxes                                                -               72,477
        Prepaid expenses                                              144,457               74,490
                                                                -------------         ------------

                Total current assets                                2,646,167            2,288,914
                                                                -------------         ------------

Property, plant and equipment,
net of accumulated depreciation
of $4,890,414 and $4,305,767                                       12,043,300            9,528,290
                                                                -------------        -------------

Other assets
        Cash, restricted                                            3,889,567                    -
        Accounts and notes receivable - officers                       59,122              193,467
        Cash value of annuity                                         171,995               40,000
        Other                                                         591,280              219,736
                                                                -------------        -------------

                Total other assets                                  4,711,964              453,203
                                                                -------------        -------------
                                                  
                Total assets                                    $  19,401,431        $  12,270,407
                                                                =============        =============

Liabilities and Stockholders' Equity

Current liabilities
        Notes payable, line-of-credit                           $   1,341,622        $   1,420,801
        Current portion of long-term debt                           1,279,188            1,029,090
        Accounts payable, trade                                     2,378,597            1,678,442
        Accrued expenses                                              281,629              260,527
        Accrued taxes                                                  84,080                    -
                                                                -------------        -------------

                Total current liabilities                           5,365,116            4,388,860
                                                                -------------        -------------

Long-term liabilities
        Long-term debt                                              9,598,315            3,402,621
        Deferred tax liability                                              -              143,476
        Post retirement benefit liability                             166,956               42,667
        Other liabilities                                               3,001                    -
                                                                -------------        -------------

                Total long-term liabilities                         9,768,272            3,588,764
                                                                -------------        -------------

Stockholders' equity
        Preferred stock, $0 par value
          5,000,000 shares authorized
          no shares issued and outstanding                                  -                    -
        Common stock, no par value
          500,000,000 shares authorized
          6,573,639 shares issued and outstanding                           -                    -
        Paid in capital                                             4,808,814            4,808,814
        Accumulated deficit                                         (540,771)            (516,031)
                                                                -------------        -------------

                                                                    4,268,043            4,292,783
                                                                -------------        -------------

                Total liabilities and stockholders' equity      $  19,401,431        $  12,270,407
                                                                =============        =============
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Operations

For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                       1997          1996          1995
                                                                   ------------  ------------  ------------ 
<S>                                                                <C>           <C>           <C>
Revenue
       Net sales                                                   $ 24,725,077  $ 28,643,415  $ 33,243,677
       Cost of sales                                                 19,597,991    21,129,265    26,092,053
                                                                   ------------  ------------  ------------

                                                                      5,127,086     7,514,150     7,151,624
                                                                   ------------  ------------  ------------


Selling, general and administrative expenses                          4,815,638     4,414,422     3,903,371
                                                                   ------------  ------------  ------------


Other income and (expense)
       Other income                                                     139,307        83,376        12,007
       Interest expense                                               (627,799)     (667,942)     (663,662)
                                                                   ------------  ------------  ------------

                                                                      (488,492)     (584,566)     (651,655)
                                                                   ------------  ------------  ------------

                  Income (loss) before taxes                          (177,044)     2,515,162     2,596,598

Income tax expense (benefit)                                          (152,304)     1,021,487       115,600
                                                                   ------------  ------------  ------------


                  Net income (loss)                                $   (24,740)  $  1,493,675  $  2,480,998
                                                                   ============  ============  ============

Per share information:

       Basic earnings per share                                    $       0.00  $       0.22  $       0.37
                                                                   ============  ============  ============

       Diluted earnings per share                                  $       0.00  $       0.22  $       0.37
                                                                   ============  ============  ============
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Stockholders' Equity

For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                               Common          Paid in        Preferred       Preferred       Accumulated
                                               Shares          Capital          Shares          Stock           Deficit

<S>                                             <C>          <C>                <C>         <C>              <C>           
Balance December 31, 1994                       4,226,066    $  2,599,814       1,200,000   $   2,400,000    $  (4,490,704)

Issuance of common shares for
   services                                       100,000           5,000               -               -                 -

Share repurchase agreement                        (1,000)        (76,000)               -               -                 -

Net income for the year                                 -               -               -               -         2,480,998
                                           --------------    ------------    ------------   -------------    -------------- 


Balance December 31, 1995                       4,325,066       2,528,814       1,200,000       2,400,000       (2,009,706)

Conversion of preferred shares                  2,400,000       2,400,000     (1,200,000)     (2,400,000)                 -

Acquisition and cancellation of shares          (151,427)       (120,000)               -               -                 -

Net income for the year                                 -               -               -               -         1,493,675
                                           --------------    ------------    ------------   -------------    -------------- 


Balance December 31, 1996                       6,573,639       4,808,814               -               -         (516,031)

Net loss for the year                                   -               -               -               -          (24,740)
                                           --------------    ------------    ------------   -------------    -------------- 


Balance December 31, 1997                       6,573,639    $  4,808,814               -   $           -    $    (540,771)
                                           ==============    ============    ============   =============    ============== 
</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>

SPURLOCK INDUSTRIES, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                            1997            1996             1995
<S>                                                                      <C>            <C>             <C>        
Operating activities:
Net income (loss)                                                        $ (24,740)     $ 1,493,675     $  2,480,998
Adjustments to reconcile net income                                                                    
  (loss) to net cash:                                                                                  
Depreciation and amortization                                               973,577         751,057          700,240
Issuance of common stock for services                                             -               -            5,000
Write off of intangible assets                                                    -               -                -
Abandonment of fixed assets                                                       -               -                -
Decrease in trade receivables                                               224,653         420,306          473,202
(Increase) in other receivables                                           (182,995)               -                -
(Increase) decrease in trading securities                                         -         200,000        (200,000)
Decrease in inventory                                                        11,449          54,133          566,152
(Increase) decrease in prepaid expenses                                       2,510       (108,843)            6,001
(Increase) in deferred tax asset                                           (92,908)               -                -
Increase (decrease) in deferred tax liability                             (143,476)         131,946           11,600
Increase (decrease) in accounts payable                                                                
   and accrued expenses                                                     805,337       (380,584)      (2,187,581)
Increase in other liabilities                                                 3,001               -                -
Increase in post retirement benefit liability                               124,289          42,667                -
                                                                        -----------     -----------      -----------
                                                                                                       
Total adjustments                                                         1,725,437       1,110,682        (625,386)
                                                                        -----------     -----------      -----------
                                                                                                       
                                                                                                       
Net cash provided by (used in)                                                                         
  operating activities                                                    1,700,697       2,604,357        1,855,612
                                                                                                       
Investing activities:                                                                                  
Purchase of fixed assets                                                (3,488,587)     (1,184,369)        (352,694)
Increase in cash restricted for capital expenditures                    (3,889,567)              -                 -
                                                                        -----------     -----------      -----------
                                                                                                       
Net cash provided by (used in)                                                                         
  investing activities                                                  (7,378,154)     (1,184,369)        (352,694)
                                                                                                       
Financing activities:                                                                                  
(Increase) decrease in other assets                                       (503,539)           2,814         (79,381)
Acquisition of common shares                                                      -       (120,000)          (1,000)
Proceeds of new borrowings                                                7,500,000               -                -
Repayment of loans to principal holders of equity securities                 65,816          30,000                -
Loans to principal holders of equity securities                            (46,176)       (125,970)        (236,461)
Write-off of advances to a principal holder of equity securities             51,357               -                -
Repayment of notes and loans                                            (1,133,388)     (1,351,511)      (1,012,309)
                                                                        -----------     -----------      -----------
                                                                                                       
Net cash provided by (used in)                                                                         
  financing activities                                                    5,934,070     (1,564,667)      (1,329,151)
                                                                                                       
Net increase in cash and cash equivalents                                   256,613       (144,679)          173,767
                                                                                                       
Beginning cash                                                              106,072         250,751           76,984
                                                                        -----------     -----------      -----------
                                                                                                       
Ending Cash                                                             $   362,685     $   106,072      $   250,751
                                                                        ===========     ===========      ===========
                                                                                                       
Supplemental cash flow information:                                                                    
Cash paid for:  Interest expense                                        $   621,149     $   667,942      $   605,825
                                                                        ===========     ===========      ===========
                                                                                                       
                           Income taxes                                 $    84,080     $   658,577      $   104,000
                                                                        ===========     ===========      ===========
                                                                                                       
Non-cash financing and investing activities:                                                           
Acquisition of fixed assets with note payable                           $         -     $ 3,305,168      $    50,818
                                                                        ===========     ===========      ===========
                                                                                                       
Conversion of accounts payable to note                                  $         -     $         -      $   839,500
                                                                        ===========     ===========      ===========
                                                                                                    
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>


SPURLOCK INDUSTRIES, INC.          

Notes to Consolidated Financial Statements
December 31, 1997 and 1996


Note 1 - Summary of significant accounting policies


Organization and operations

Spurlock Industries,  Inc. (the "Company") was originally  incorporated on March
17, 1986 in Colorado as Air Resources Corporation. On January 27, 1996, Spurlock
Industries,  Inc. was formed in Virginia.  A merger of the two  corporations was
completed on July 26, 1996.  The merger was accounted for as a  recapitalization
and no adjustments  were made to the carrying  amounts of assets and liabilities
of the combined companies. Shares of the combining companies were exchanged on a
one for one basis.  The Company is engaged in the development,  production,  and
distribution of resins, liquid fertilizers and formaldehyde.


Principles of consolidation

The consolidated  financial  statements include the accounts of its wholly owned
subsidiary Spurlock Adhesives,  Inc. All significant  intercompany  transactions
have been  eliminated.  Substantially  all of the  Company's  revenues have been
derived from the operations of Spurlock Adhesives, Inc.


Restricted cash

Undisbursed  funds  generated by the Industrial  Revenue Bonds are restricted to
the  construction  of the new  formaldehyde  manufacturing  facility in New York
State.  Disbursements  are executed by the  trustees  upon the  presentation  of
approved construction draws. The company has no other access to these funds.


Inventories

Inventory is stated at the lower of cost or market using the first in, first out
method.  Finished  goods include raw materials,  direct labor and overhead.  Raw
materials  include  purchase  and  delivery  costs.  Inventory  consists  of the
following at December 31.

                                                  1997           1996
------------------------------------------------------------------------

Raw materials                                 $  467,319      $  397,511
Work in process                                    8,028           9,493
Finished goods                                    54,836         134,628
                                              --------------------------

                                              $  530,183      $  541,632
                                              ==========      ==========





<PAGE>

SPURLOCK INDUSTRIES, INC.   

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 1 - Summary of significant accounting policies (continued)

Property and equipment

Property and equipment are carried at cost.  Depreciation  is computed using the
straight line method over the estimated useful lives of the assets.  When assets
are  retired or  otherwise  disposed  of, the cost and the  related  accumulated
depreciation  are removed from the accounts,  and any resulting  gain or loss is
recognized in operations for the period.  The cost of repairs and maintenance is
charged to operations as incurred and  significant  renewals or betterments  are
capitalized.

Useful lives for property and equipment are as follows:

Building                                    20-30 years
Machinery and equipment                      5-25 years
Office equipment                                7 years
Vehicles                                      4-8 years

Start-up and pre-operating costs

Start-up  and  pre-operating   costs  include  all   nonrecurring,   non-capital
manufacturing  and  other  costs,  such  as  promotional  expenses  incurred  in
preparing for the operation of a new facility are expensed as incurred.

Deferred financing costs

Costs associated with obtaining  Industrial  Revenue Bond financing to construct
the new manufacturing facility in New York State, were capitalized.  These costs
are to be  amortized,  utilizing  the  interest  method,  over  the  life of the
Industrial Revenue Bond, as an adjustment to interest expense.

Revenue recognition

The  Company  recognizes  revenue  on the sales of its  products  at the time of
shipment.

Cash and cash equivalents

Cash  and  cash  equivalents,   consist  of  deposits  and  highly  liquid  debt
instruments with original maturities of less than 90 days.

Environmental costs

The  Company's   business   activities   are  monitored  by  state  and  federal
environmental  agencies  and the Company is  required to obtain  permits for the
operation of its facilities.  Environmental  expenditures that relate to current
operations are expensed or capitalized as appropriate.  Liabilities are recorded
when  environmental  assessments and or remedial  efforts are probable,  and the
costs can be  reasonably  estimated.  Generally,  the  timing of these  accruals
coincides with the  completion of a feasibility  study or commitment to a formal
plan of action.  Environmental costs charged to operations  aggregated $184,259,
$202,076  and $277,349  for the years ended  December  31, 1997,  1996 and 1995,
respectively.



<PAGE>

SPURLOCK INDUSTRIES, INC.     

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 1 - Summary of significant accounting policies (continued)

Advertising

Advertising  costs are  charged to expense  when  incurred.  Amounts  charged to
expense were $8,291,  $28,101 and $27,880 for the years ended December 31, 1997,
1996 and 1995, respectively.

Estimates

The preparation of the Company's  financial  statements  requires  management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from these
estimates.  At December 31, 1997, the allowance for doubtful accounts receivable
was $12,981.  There was no recorded allowance for doubtful allowance at December
31, 1996.

Income taxes

Deferred income taxes arise from temporary differences resulting from income and
expense items (principally net operating losses,  postretirement  benefits,  and
accelerated  depreciation) reported for financial accounting and tax purposes in
different  periods.  Deferred  taxes are  classified as current or  non-current,
depending on the  classification of assets and liabilities to which they relate.
Deferred  taxes arising from  temporary  differences  that are not related to an
asset or liability  are  classified as current or  non-current  depending on the
periods in which the temporary differences are expected to reverse.

Reclassifications

Certain 1996 and 1995 amounts  have been  reclassified  to conform with the 1997
presentation.

Earnings per share

Effective  December 31,  1997,  the Company  adopted SFAS No. 128,  Earnings per
Share. This statement replaces primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by  dividing  income  available  to common  shareholders  by the
weighted  average number of common shares  outstanding  for the period.  Diluted
earnings per share reflects the potential dilution that could occur if all stock
options and other stock-based  awards, as well as convertible  securities,  were
exercised and converted into common stock.  All net income per share amounts for
all periods have been presented and, where  appropriate,  restated to conform to
SFAS No. 128 requirements.

Concentration of credit risk

The  Company's  short-term  financial  instruments  consist  of  cash  and  cash
equivalents,  accounts and loans  receivable,  and payables  and  accruals.  The
carrying amounts of these financial instruments  approximates fair value because
of their short-term  maturities.  Financial instruments that potentially subject
the Company to a  concentration  of credit risk consist  principally of cash and
accounts  receivable,  trade.  During the year the  Company  did  maintain  cash
deposits at financial  institutions  in excess of the $100,000  limit covered by
the Federal Deposit Insurance Corporation. The uninsured amount to $248,640. The
Company has several major  customers,  the loss of any one of which could have a
material negative impact upon the Company. Additionally, the Company maintains a
line of  credit  and a  significant  portion  of its  long-term  debt  with  one
financial institution.  The maintenance of a satisfactory relationship with this
institution is of significant  importance to the Company.


<PAGE>


SPURLOCK  INDUSTRIES, INC. 

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 1 - Summary of significant accounting policies (concluded)

Stock-based compensation

The Company applies  Accounting  Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees,  and related  interpretations  in accounting  for its
stock-based  compensation plans.  Accordingly,  no compensation expense has been
recognized  for the stock  options  granted and employee  stock  purchases.  The
Company has adopted the  disclosure-only  provisions of SFAS No. 123, Accounting
for Stock-Based Compensation.

Recently issued accounting pronouncements

In 1997, the Financial  Accounting Standards Board issued Statement of Financial
Accounting  Standards No. 130, "Reporting  Comprehensive  Income" (SFAS 130) and
SFAS 131,  "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 130  establishes  standards for the reporting and displaying of
comprehensive  income  and its  components  in  financial  statements.  SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise,"
and specifies  new  disclosure  requirements  for  operating  segment  financial
information.  In February  1998,  SFAS No. 132,  "Employers'  Disclosures  about
Pensions  and Other  Postretirement  Benefits"  (SFAS 132) was issued.  SFAS 132
revises  and  standardizes   employers'  disclosures  about  pension  and  other
postretirement  benefit  plans.  These  standards are effective for fiscal years
beginning  after  December 15, 1997.  The Company will adopt the  provisions  of
these standards  during the first quarter of 1998 and does not anticipate  their
adoption to have a material effect on the financial statements.

Note 2 - Misappropriation of assets and restatement of financial statements

In January 1998, the Company  discovered  that financial  information  regarding
payments to a note  receivable  for an executive  officer of the Company and the
payment of travel and related  expenses of this individual had been falsified to
intentionally mislead management concerning their propriety.  Subsequent to this
discovery,  another  executive  officer  admitted  to the  payment  of  personal
expenses by the Company  recorded as  equipment.  An  independent  investigation
concluded that these acts were  apparently  conducted  through  collusion of two
other  employees of the Company.  Accordingly,  records of the Company,  and its
predecessor companies, were apparently falsified in 1992.

In total,  the  independent  investigation  revealed  approximately  $275,000 in
personal  expenses  paid by the  Company  and  charged to  selling,  general and
administrative  expense.  Additional personal expenses of approximately  $73,000
were capitalized as equipment.

In February  1998,  the Company  received  full  restitution  for the $73,000 in
personal  expenses  capitalized  and  approximately  $8,000 in personal  expense
charged to selling,  general and administrative  expenses.  The $73,000 has been
reclassified  as a note  receivable and interest  income has been accrued at the
cost of funds to the Company.  Total  restitution,  including  accrued interest,
aggregated $101,944.

On April 10, 1998,  settlement  was reached  regarding  the  remaining  personal
expenses paid by the Company,  aggregating  approximately $267,000.  Restitution
will include  interest,  at the cost of funds to the Company to settlement date,
as well  as  partial  reimbursement  of  professional  expenses.  The  aggregate
principal amount of restitution,  at April 10, 1998, was $375,000. The principal
amount of restitution  will bear interest at 9.00%,  payable monthly in advance,
with the entire  principal  amount due April 8, 2003.  Although  collateral  and
guarantees were obtained, it is management's opinion that sufficient uncertainty
exists to recognize income as received.




<PAGE>

SPURLOCK INDUSTRIES, INC.            

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 2 -  Misappropriation  of assets and  restatement  of financial  statements
          (concluded)

The effect of the  restatement  on the  December 31, 1996  Consolidated  Balance
Sheet  resulted in a decrease of $73,075 in fixed assets,  with a  corresponding
increase to notes  receivable,  and an increase of $26,656 in retained  earnings
compared to December 31, 1996 amounts previously reported.

After  restatement,  the pretax effect of the overstatement of selling,  general
and administrative expenses related to the misappropriation amounted to $15,484,
and the  understatement  of interest  income of $11,182,  all of which is deemed
immaterial.  The  amounts of the  restatements  were  mitigated  by the  initial
recognition of the personal expense as travel and entertainment expenses and the
full   restitution   of  the  amounts   capitalized.   Since   learning  of  the
misappropriation, the Company has taken actions intended to prevent a recurrence
of this situation.

Note 3 - Investments

Securities that are bought and held  principally for the purpose of selling them
in the near term are classified as trading  securities.  Trading  securities are
recorded at fair value as a current  asset with the change in fair value  during
the period  included  in  earnings.  These were no  investments  held as trading
securities  as of December 31, 1997 and 1996 or for the year ended  December 31,
1997.

The Company purchased trading securities during the year ended December 31, 1996
for cash  aggregating  $397,500.  The Company had sales  proceeds  from  trading
securities  during the year ended  December 31, 1996,  amounting to $581,167 and
realized a (loss) for this period aggregating $(16,333).

The Company had no sales proceeds from trading  securities during the year ended
December 31, 1995. The Company had no unrealized  gains (losses) at December 31,
1995.

Note 4 - Property and equipment

Property and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                      1997           1996
                                                                 ----------------------------
<S>                                                              <C>              <C>        
Land                                                             $    219,233     $   219,233
Building                                                            5,440,321         547,041
Machinery and equipment                                             7,358,963      12,326,041
Construction in progress                                                2,932         305,913
Vehicles                                                              273,596         285,189
Furniture and fixtures                                                161,101         150,640
New York project                                                    3,477,568               -
                                                                 ----------------------------
                                                                   16,933,714      13,834,057
Less: Accumulated depreciation and amortization                     4,890,414       4,305,767
                                                                 ----------------------------
                                                                 $ 12,043,300     $ 9,528,290
                                                                 ============     ===========
</TABLE>
Depreciation  charged to operations was $973,577,  $751,057 and $700,240 for the
years ended December 31, 1997, 1996 and 1995, respectively.


<PAGE>

SPURLOCK INDUSTRIES, INC.                          

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 5 - Line of credit

The  Company  utilizes  a line of credit  secured  by  accounts  receivable  and
inventories to provide working capital.  Advances under this line of credit bear
interest at the lesser of prime + 1/2% or LIBOR + 2.75%,  and are limited to the
lesser of  $3,500,000,  or 85% of eligible  accounts  receivable  and 60% of the
inventory  value. At December 31, 1997 and 1996,  advances  outstanding  totaled
$1,341,622 and $1,420,801, respectively.

Note  6 -  Advances  and  notes  receivable  for  principal  holders  of  equity
securities

Accounts  and notes  receivable  for  principal  holders  of  equity  securities
consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                1997               1996   
                                                                           -------------------------------
<S>                                                                        <C>                  <C> 
Notes receivable and advances                     
with various interest rates                                                $  161,066           $  232,062
Less: current portion                                                         101,944               38,595
                                                                           -------------------------------

                                                                           $   59,122           $  193,467
                                                                           ==========           ==========
</TABLE>
During 1997, the Company wrote off $51,357 in advances and notes  receivable for
a principal holder of equity securities. See Note 2.

Note 7 - Long-term debt
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31:
                                                                                1997               1996
                                                                           -------------------------------
<S>                                                                        <C>                  <C>       
Note payable bank, payable in monthly installments
of $6,250 plus interest at 8.0% through May 2003                           $  1,500,000         $        -

Industrial revenue bonds, payable in quarterly installments
of $150,000 with interest at 4.74% on December 31, 1997                       6,000,000                  -

Note payable bank, payable in monthly installments of
$50,542 with interest at prime plus .5% or LIBOR plus
2.75% (8.42% at December 31, 1997) secured by
plant and equipment due July, 2002                                            2,830,328          3,436,832

Note payable bank, payable in monthly installments
of $1,832 at 12% interest, secured by real property due in
August, 2004                                                                     99,934            109,295

Note payable vendor, payable in monthly installments
of $23,320 with interest at prime plus 1.5% (10% at
December 31, 1997) due March, 1998                                               69,940            349,780

Note payable, supplier, payable in monthly installments
of $14,814, with interest at 8.25%, through August 1999                         263,185            400,504






<PAGE>

SPURLOCK INDUSTRIES, INC.                                                      

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 7 - Long-term debt (concluded)
                                                                                1997               1996   
                                                                           -------------------------------
Note payable, bank, payable in monthly installments of                     
$390 including interest of 8.88% through July 1999                                6,904            10,786

Note payable, vendor, payable in monthly installments of
$784 including interest of 13.4% through October 1999                            15,552                 -

Various notes payable, payable in monthly installments
of $4,634 with interest from 8% to 10% due December 1997
to October 2000 secured by personal property                                     91,660           135,300
                                                                           ------------------------------
                                                                             10,877,503         4,431,711
Less current portion                                                          1,279,188         1,029,090
                                                                           ------------------------------

                                                                           $  9,598,315       $ 3,402,621
                                                                           ============       ===========
Maturities of long-term debt are as follows:

        December 31, 1998                                                  $ 1,279,188
        December 31, 1999                                                    1,446,368
        December 31, 2000                                                    1,301,145
        December 31, 2001                                                    1,296,647
        December 31, 2002                                                    1,096,647
        Later years                                                          4,456,780
                                                                           -----------

                                                                           $10,877,527
                                                                           ===========
</TABLE>

At December  31,  1997,  the  outstanding  principal  balance of the  industrial
revenue bonds was $6,000,000. The issue is at $6,000,000 with quarterly payments
of $150,000 beginning January 31, 1998 at 4.74% interest rate. The bond issue is
collateralized by property, plant, and equipment.

The Company  had an  outstanding  irrevocable  letter of credit in the amount of
$6.0 million as of December 31, 1997. This letter of credit, which has a term of
five  years,  collateralizes  the  Company's  obligations  under the  Industrial
Revenue Bond financing for the New York State manufacturing  facility.  The fair
value of this  letter of credit  approximates  the  contract  value based on the
nature of the fee arrangement with the issuing banks.

Amortization of deferred  financing costs aggregated $51,423 in 1997. There were
no deferred  financing costs amortized for the years ended December 31, 1996 and
1995.

The Company  capitalizes  interest on assets  constructed  for its  formaldehyde
production  facility in New York State.  In 1997,  total interest costs incurred
were $683,481,  of which $55,682 was  capitalized.  Interest was not capitalized
for 1996 or 1995.

In 1997,  $533,927  of  start-up  and  pre-operating  expenses  incurred  in the
construction  and initial  production of the new  manufacturing  facility in New
York  State were  written  off.  There were no costs of this  nature in 1996 and
1995.

<PAGE>

SPURLOCK INDUSTRIES, INC.     

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 8 - Financial instruments with off-balance-sheet risk

During 1997, the Company  entered into an interest rate swap agreement  ("swap")
for purposes of fixing the variable rate aggregated the Industrial  Revenue Bond
("IRB") borrowing. This swap alters the interest rate characteristics of the IRB
to eliminate the interest rate sensitivity.  Swaps involve the periodic exchange
of payments over the life of the agreements.  Amounts  received or paid on swaps
are used to manage interest rate sensitivity.  At December 31, 1997, the Company
had one swap  agreement  outstanding,  the net effect of which is to effectively
covert  the  $6.0  million  variable  rate IRB to a fixed  rate of  4.74%  until
maturity.  Payments or receipts under this agreement are due monthly. Changes in
the fair  value  of the  swap is not  reflected  in the  accompanying  financial
statements.  The estimated  fair value of this  instrument  was $(182,921) as of
December 31, 1997. The Company's  credit exposure on this swap is limited to the
value of the swap  that has  become  favorable  to the  Company  in the event of
nonperformance  by the  counterparties.  The Company did not require  collateral
from counterparties on its existing agreement. The Company actively monitors the
credit  ratings of  counterparties  and  anticipates  performance by the counter
parties with whom they transacted the swap.

Note 9 - Related party transactions

During  September 1994 a shareholder of the Company entered into an agreement to
purchase 533,333 shares of preferred stock. During January 1996 this shareholder
converted these shares and 666,667 shares of preferred stock into common stock.

On June 30, 1995, Harold N. Spurlock,  then Chairman of the Board, President and
Chief  Executive  Officer  of the  Company,  received  a loan in the  amount  of
$112,500 from Spurlock  Adhesives.  Principal and interest at 9.0% per annum are
payable in five equal annual  installments  commencing in July 1996. The balance
as of December  31, 1997 was  $59,122.  The loan  relates to the purchase by Mr.
Spurlock  of  certain  manufacturing  assets  in  Malvern,  Arkansas  that  were
contributed by Mr. Spurlock to Air Resources  pursuant to the Spurlock Adhesives
Agreement.

In July 1996, the Company  entered into an employment  contract with its founder
and former chief  executive  officer to serve as its vice  president for product
development  through August 31, 1999. The contract provides for an annual salary
of $180,000  during the  contract  term.  The  contract  also  provides for post
retirement  benefit  payments  of  $100,000  per  year  for a  five-year  period
beginning  August 31,  1999.  The  Company  intends to fund the post  retirement
payments currently by depositing monthly payments of approximately  $12,000 into
an interest bearing account.

The  estimated  payment  assumes an earned  interest  rate of 5% per year on the
deposit  amounts and a discount rate of 8% per year to arrive at the net present
value of the annual  retirement  benefit due at August 31, 1999. The Company has
recorded  $124,284 and $42,667 of expense for post  retirement  benefits for the
years ended December 31, 1997 and 1996 respectively.  The Company estimates that
its net  commitment  for the period  from  January  1, 1998 to August  31,  1999
pursuant to this  contract  will be  approximately  $864,000 for both salary and
post retirement benefits. The Company has invested in annuities to fund the post
retirement  benefit.  The cash value of these annuities  aggregated $171,995 and
$40,000 as of December 31, 1997 and 1996, respectively.

In 1993, the Company made advances to an Executive Officer aggregating $126,000.
These advances were offset through the purchase of land adjacent to the Waverly,
Virginia production facility. In March 1994, a mortgage of $130,000 was found to
encumber the property,  preventing  transfer of title.  In 1997,  these advances
were discovered as unpaid and unrecognized. The advances were recognized and the
remaining  amount  repaid by the  Executive  Officer in the amount of $97,633 on
October 15, 1997.


<PAGE>

SPURLOCK INDUSTRIES, INC.                                      

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 10 - Description of leasing arrangements

The Company leased rail cars, trucking equipment, and a formaldehyde plant under
operating  leases  expiring in various  years  through  2003.  The lease for the
formaldehyde plant ($660,000 per year) commenced upon successful start up, which
was in  February,  1993.  The Company had an option to purchase the plant at the
expiration  of the initial 10 year lease for the greater of fair market value or
$3,580,000,  or to renew the lease for an additional 10 years. During July 1996,
the plant was purchased for $3,200,000.

The Company has remaining  operating  leases for trucking and rail car equipment
which have fixed annual payments as follows:  $34,824 in 1998,  $33,000 in 1999,
$33,000 in each year thereafter through 2001.

Rent expense was $78,916, $395,627 and $761,997 for the years ended December 31,
1997, 1996 and 1995.

Note 11 - Income taxes

Deferred income taxes arise from temporary differences resulting from income and
expense items  reported for financial  accounting  and tax purposes in different
periods.  Deferred taxes are classified as current or non-current,  depending on
the  classification  of assets and  liabilities  to which they relate.  Deferred
taxes  arising from  temporary  differences  that are not related to an asset or
liability are classified as current or  non-current  depending on the periods in
which the temporary differences are expected to reverse.

Deferred tax assets and  liabilities at December 31, 1997 and 1996 resulted from
the following:
<TABLE>
<CAPTION>

                                                                                    1997             1996
                                                                                -----------------------------
<S>                                                                             <C>               <C>
Deferred tax assets
     Operating loss carry forward                                               $    69,682       $         -
     Post retirement liability                                                       63,925            14,507
Deferred tax liabilities
     Accelerated depreciation                                                        40,699            157,983

The provision for income taxes expense (benefit) at
December 31, 1997 and 1996 consists of the following:
                                                                                    1997             1996
                                                                                -----------------------------

Current                                                                         $     6,329       $   987,910
Deferred                                                                           (158,633)           26,323
                                                                                -----------------------------

                                                                                $  (152,304)      $ 1,021,487
                                                                                ============      ===========
</TABLE>




<PAGE>



SPURLOCK INDUSTRIES, INC.        

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 11 - Income taxes (concluded)

A  reconciliation  of the federal taxes at statutory  rates to the tax provision
for the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>

                                                                   1997                1996                 1995
                                                               ----------------------------------------------------

<S>                                                            <C>                 <C>                  <C>        
Federal statutory rate                                         $    69,510         $    846,091         $   882,843
State income taxes                                                  14,571              149,415             104,000
Utilization of loss carry forward                                 (69,682)             (13,912)           (801,532)
Surtax exemption                                                         -                    -            (11,750)
Book/tax depreciation difference                                    13,838             (48,083)            (34,000)
Post retirement benefits                                          (63,925)               14,507                   -
Other                                                            (116,616)               73,469            (23,961)
                                                               ----------------------------------------------------

Provision for income taxes expense (benefit)                   $ (152,304)         $  1,021,487         $   115,600
                                                               ====================================================
</TABLE>

Note 12 - Stockholders' equity

During 1995 the Company  adopted a stock  option plan for the benefit of certain
employees,  officers  and  directors.  The number of  restricted  common  shares
reserved under the plan is 500,000. The option price on the grant date shall not
be less than the fair market value on such date  provided  that an owner of more
than 10% of the common  stock  shall not have an option  granted at a price less
than 110% of the fair market value on the date of the grant.  During  1995,  the
Company  issued  210,000  options  exercisable at $0.50 per share under the plan
which  expire  50,000 in 1998,  50,000 in 2000 and 110,000 in 2005.  During June
1996, the Company  granted  additional  options under the plan for 75,000 shares
exercisable at $0.55 for a ten year period. No options were granted for the year
ended December 31, 1997.

Following is a summary of the transactions in the plan:
<TABLE>
<CAPTION>

                                                                                                 Weighted
                                                                              Shares         Average Price
                                                                           -------------------------------
<S>                                                                               <C>         <C>
Balance, beginning of period                                                            -     $        -
Granted                                                                           210,000           0.50
Canceled                                                                                -              -
Exercised                                                                               -              -
                                                                           -----------------------------
Balance, December 31, 1995                                                        210,000           0.50
Granted                                                                            75,000           0.55
Canceled                                                                                -              -
Exercised                                                                               -              -
                                                                           -----------------------------
Balance, December 31, 1996 and 1997                                               285,000           0.51
                                                                           ==============
Options available at December 31, 1997                                            215,000
                                                                           ==============

</TABLE>


<PAGE>

SPURLOCK INDUSTRIES, INC.         

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 12 - Stockholders' equity (continued)

Pro forma information regarding net income and earnings per share is required by
SFAS 123,  and has been  determined  as if the  Company  had  accounted  for its
employee stock options under the fair value method of that  Statement.  The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions;  risk-free
interest rate of 6.87%; dividend yields of 0%; volatility factor of 2.05%; and a
weighted-average expected life of the option of 5.2 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is  calculated  as of the date of  grant.  TheCompany's  pro  forma  information
follows:
<TABLE>
<CAPTION>

                                                                 1997                1996              1995
                                                          ------------------------------------------------------

<S>                                                       <C>               <C>                  <C>           
Pro forma net income (loss)                               $    (24,740)     $    1,474,969       $  2,433,940
Pro forma earnings per share                                                                    
     Basic                                                $          0.00   $            0.22    $          0.36
     Diluted                                              $          0.00   $            0.21    $          0.36
</TABLE>
                                                                        
During  January,  1996 the holder of the 1,200,000  shares of preferred stock of
Air Resources Corporation converted these shares into 2,400,000 shares of common
stock of Air Resources Corporation. In connection with the recapitalization, the
Company  agreed to  reacquire  80,000  shares of the Air  Resources  Corporation
common stock from a  dissenting  shareholder  for $120,000 in cash.  Also during
1996, the Company acquired 71,427 shares of common stock of Air Resources from a
former officer.


<PAGE>


SPURLOCK INDUSTRIES, INC.                                                    

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 13 - Earnings per share

The  following  table  sets  forth  the  reconciliation  of the  numerators  and
denominators of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>

                                                                                   Year Ended December 31,
                                                                     -------------------------------------------------
                                                                           1997             1996              1995
----------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C>
Numerator:
Net income (loss) available to shareholders                           $    (24,740)     $  1,493,675      $  2,480,998
                                                                      =============     ============      ============

Denominator:
Weighted average shares outstanding                                      6,573,639         6,711,733         6,717,666
                                                                      ------------------------------------------------

Basic EPS weighted average shares outstanding                            6,573,639         6,711,733         6,717,666

Effect of dilutive securities:
     Incremental shares attributable to the
        Stock Option Plan                                                   10,509           210,900            52,500
                                                                      ------------------------------------------------

Diluted EPS weighted average shares outstanding                          6,584,148         6,922,633         6,770,166
                                                                      ================================================

Basic earnings per share                                              $          0.00   $          0.22   $          0.37
                                                                      ===============   ===============   ===============

Diluted earnings per share                                           $           0.00 $            0.22  $            0.37
                                                                       ==============   ===============    ===============

</TABLE>

<PAGE>


SPURLOCK INDUSTRIES, INC.                 

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 14 - Sales to major customers and concentration of credit risk

The Company,  whose  customers  produce raw materials  used in the  construction
industry  made sales in excess of 10% of its gross  revenues  for the year ended
December 31, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>

                                                                                            Receivable
     Customer                                              Sales                %            at 12/31
     -------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>         <C>
     1997
        International Paper                             $ 4,423,800             17%         $ 158,681
        Union Camp                                        3,919,989             15            170,026
        Schenectady                                       3,869,340             15             71,964
        Willamette                                        4,715,645             19            113,564

     1996
        International Paper                             $ 4,537,102             16%         $ 108,000
        Union Camp                                        3,865,062             13            162,000
        Schenectady                                       3,521,857             12             57,000
        Willamette                                        7,478,831             26            424,000

     1995
        International Paper                             $ 4,964,000             15%         $ 124,000
        Union Camp                                        3,900,000             12            166,000
        Schenectady                                       5,124,000             15             41,000
        Willamette                                        7,454,000             22            636,000

</TABLE>

Note 15 - Commitments and contingencies

In connection with the construction of the formaldehyde  production  facility in
New York  State,  the  Company has  entered  into a turnkey  plant  construction
agreement  with DB Western,  Inc.,  whereby the Company will pay an aggregate of
$6,568,100  of  construction  costs.  The  Company  paid a deposit of $66,000 at
October 1, 1996 to  initiate  the  contract.  The total  amount  outstanding  at
December  31, 1997 was  $3,222,100.  Construction  is  currently  scheduled  for
completion in June 1998.

Should the  Company be unable to complete  the  contract,  the deposit  would be
forfeited and any additional  costs due and payable  incurred by D.B. Western in
connection with the project would become due by the Company.

In connection  with the new production  facility in New York state,  the Company
entered into an operating lease agreement with D.B.  Western,  Inc. on September
30, 1997, for a formaldehyde plant adjacent to the Company's facility.  The term
of the  lease is for ten (10)  years at a monthly  rental  payment  of  $46,139.
Rental payments  commence ten days after the plant is mechanically  operational.
The Company  anticipates  completion  of the  facility in  mid-1998.  Based upon
completion of the facility on July 1, 1998, the Company estimates lease payments
of $276,834 in 1998 and $553,668 for each year from 1999 to 2007. Rental expense
for 2008 is estimated to be $276,834.

The Company purchases substantially all of its three raw material components for
its resin,  formaldehyde,  and fertilizer  operations from four  suppliers.  The
Company purchased $13,488,767,  $15,158,111 and $19,232,831 from these suppliers
during  1997,  1996 and 1995 and had a  balance  due to them of  $1,742,592  and
$1,089,433 at December 31, 1997 and 1996.  The Company  believes that  alternate
sources for its raw materials are readily available.

<PAGE>

SPURLOCK INDUSTRIES, INC.    

Notes to Consolidated Financial Statements
December 31, 1997 and 1996


Note 15 - Commitments and contingencies  (concluded)

In April 1997, a shareholders' derivative suit was filed against the Company and
certain  current  and former  officers  and  directors  of the  Company in State
District Court in Denver,  Colorado. The suit, which has subsequently been moved
to the United States  District Court for the District of Colorado,  alleges that
the  defendants  engaged in various  activities  that breached  their  fiduciary
duties to the plaintiffs  and/or violated  provisions of Colorado law applicable
to domestic corporations.

The Special Litigation  Committee is currently  conducting an investigation into
matters that are likely to cause the supplement of its report,  initially issued
in October  1996.  The Company  expects to defend the lawsuit to the full extent
appropriate,  upon  resolution  of the  pending  investigation.  At  this  time,
management  cannot  reliably  estimate the potential  effect of this suit on the
financial statements of the Company

During  1993,  the  Company  was made aware of a claim by two  former  directors
requesting that the Company  repurchase  381,000 shares of its common stock from
said directors pursuant to a reorganization  agreement entered into during 1992.
Subsequently,  one of these former directors sold his holdings of 233,000 common
shares. The purchase agreement set the repurchase price at $2.81 per share or an
aggregate of $418,280  after  considering  the above  described  disposition  of
shares by the former director.  The Company settled these claims by paying these
individuals  $84,690 in cash in 1995 and by  repurchasing  71,427  common shares
from one of the  individuals  for  $75,000 in 1996.  The Company had accrued the
potential  maximum  liability of $75,000 at December 31, 1995. In addition,  the
Company  repurchased  and  retired  1,000  shares  of  common  stock  from  this
individual for $1,000.


Note 16 - Pension plan

The Company has a 401(k) retirement plan for the benefit of eligible  employees.
Contributions  are  funded  by the  Company  and  established  by the  Board  of
directors  annually.  Contributions  for  1997,  1996  and 1995  were  $166,282,
$132,476 and $113,114, respectively.

<PAGE>


SPURLOCK INDUSTRIES, INC.     

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

Note 17 - Disclosures about Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>

                                                                   1997                               1996
                                                    -------------------------------------------------------------------
                                                        Carrying         Est. Fair         Carrying           Est. Fair
                                                          Value            Value             Value              Value
<S>                                                 <C>               <C>              <C>                <C>
Financial assets
   Cash                                             $     362,685     $     362,685    $      106,072     $     106,072
   Accounts receivable                                  1,222,277         1,222,277         1,446,930         1,446,930
   Notes receivable                                       161,066           161,066           232,062           232,062
   Cash value of annuity                                  171,995           171,995            40,000            40,000

Financial liabilities
   Notes Payable                                        1,341,622         1,341,622         1,420,801         1,420,801
   Long term debt                                       9,598,315         9,598,315         3,402,621         3,402,621
   Post retirement benefit liability                      166,956           166,956            42,667            42,667

Financial instruments with off-balance sheet risk
  Interest rate swap agreement                                  -         (182,921)                 -                 -


</TABLE>


<PAGE>



Item 9.           Changes  in and  Disagreements  with Accountants on Accounting
                  and Financial Disclosure

         On February 17, 1998, the Board of Directors  approved the  replacement
of  James  E.  Scheifley  &  Associates,  P.C.  (formerly  Winter,  Scheifley  &
Associates,  P.C.) as the independent  accountant  chosen to audit the Company's
financial statements and approved the appointment of Cherry,  Bekaert & Holland,
L.L.P.  as the Company's  independent  accountant  for the 1997 fiscal year. The
Company has previously  disclosed the appointment to the Commission on a Current
Report on Form 8-K dated February 17, 1998.


                                    PART III

Item 10.          Directors and Executive Officers of the Registrant

         Directors.  The business experience of the directors of the Company for
the past five years is summarized below.

         PHILLIP S. SUMPTER, 58, has been Chairman of the Board of Directors and
Chief  Executive  Officer  of both the  Company  and  Spurlock  Adhesives  since
February 11,  1998.  Mr.  Sumpter has served as a director of the Company  since
December 1995 and was its Executive  Vice  President from March 1996 to February
11, 1998. He was a director of Air Resources from December 1995 to July 1996. In
March 1996, he was appointed Executive Vice President of Spurlock  Adhesives,  a
subsidiary  of the Company and Air  Resources.  He was in private  practice as a
business consultant from June 1993 to March 1996. He has also served as Director
of Marketing of Monadnock  Lifetime  Products,  Inc., a  manufacturer  of police
protection equipment,  since January 1995. Mr. Sumpter was Chairman of the Board
of Wibbies,  Inc., a manufacturer of children's clothing,  from February 1990 to
May 1993. In October 1993,  Wibbies,  Inc. filed a petition for  liquidation and
sale of assets under Maryland law.

         HAROLD N.  SPURLOCK,  73, has served as a director of the Company since
January  1996.  Mr.  Spurlock was  Chairman of the Board of Directors  and Chief
Executive  Officer of the Company from January 1996 to August 1996. He served as
Chairman of the Board of Directors and Chief Executive  Officer of Air Resources
from August 1992 to July 1996 and as President  from July 1994 to July 1996.  He
also served as Chairman  of the Board of Spurlock  Adhesives,  which he founded,
from November 1989 until August 1996. In August 1996, Mr. Spurlock became a Vice
President of Spurlock Adhesives in charge of product development.

         RAYMOND G.  TUTTLE,  71, has served as a director of the Company  since
January 1997. Mr. Tuttle has been in private  practice as a commission  salesman
of structural  steel since 1995.  Mr. Tuttle has served as Chairman of the Board
of Standard  Supplies  Inc.,  a  manufacturer  of  fabricated  steel  located in
Rockville,  Maryland and as General Manager for approximately the past 13 years.
He also served as a member of the Board of Directors of Devlin Lumber,  a lumber
distributor.

         GLEN S.  WHITWER,  53, has served as a director  of the  Company  since
August 1996,  and has been a principal of Whitwer & Company,  Inc., a management
consulting  firm located in Kensington,  Maryland,  since September 1994. He was
co-owner  of Quinn,  Whitwer & Co.,  Inc.,  a  business  consultant  located  in
Bethesda, Maryland, from July 1986 to September 1994.

         Executive Officers.  The business experience of Phillip S. Sumpter, the
Chairman and Chief Executive Officer of the Company,  for the past five years is
summarized above. The business  experience of Irvine R. Spurlock,  the President
of the Company, for the past five years in summarized below.


                                      -39-
<PAGE>

         IRVINE R.  SPURLOCK,  44, is currently  President  of the Company.  Mr.
Spurlock previously served as Chairman of the Board of Directors,  President and
Chief Executive Officer of the Company from August 1996 to February 11, 1998 and
had been a director of the Company from  January 1996 to February 11, 1998.  Mr.
Spurlock was Executive Vice President of the Company from January 1996 to August
1996. He was Executive  Vice  President of Air Resources  from June 1995 to July
1996 and a director from December 1992 to July 1996. Mr.  Spurlock has served as
President  of  Spurlock  Adhesives  since 1989 and was  Chairman of the Board of
Directors  and Chief  Executive  Officer from August 1996 to February 1998 and a
director from 1989 to February 1998.

         Unauthorized  Advances  to  Former  Officers  and  Directors.  In early
January and early February 1998, the Company discovered that two of its officers
and  directors,  Irvine R.  Spurlock and H. Norman  Spurlock,  Jr., had diverted
corporate  funds for personal use and that,  according to the Company's  Special
Litigation  Committee,  a third  officer,  Warren E. Beam,  had  colluded in the
diversions by Norman  Spurlock.  For further  information  on the  diversions of
corporate funds and the subsequent resignations of these officers and directors,
see Item 3., "Legal Proceedings" above.

         The business  experience  of Irvine R. Spurlock for the past five years
is summarized  above.  The business  experience of H. Norman  Spurlock,  Jr., an
executive  officer and a director of the Company  through  January 23, 1998, and
Warren E. Beam,  Jr., an executive  officer of the Company  through  January 26,
1998, for the past five years is summarized below.

         H. NORMAN SPURLOCK,  JR., 36, served as Executive Vice President of the
Company from August 1996 to January 23, 1998, and as Secretary and a director of
the Company  from  January  1996 to January 23,  1998.  From  January 1996 until
August 1996, he served as Vice President. Mr. Spurlock was Vice President of Air
Resources  from March 1994 to July 1996,  Secretary  from June 1994 to July 1996
and a  director  from  December  1992  to July  1996.  He was  Treasurer  of Air
Resources  from June 1993 to July 1994.  Mr.  Spurlock  also served as Executive
Vice  President  of Spurlock  Adhesives  from August 1996 to January 1998 and as
Secretary and a director  from 1989 to January  1998.  From 1989 to August 1996,
Mr. Spurlock served as Vice President of Spurlock Adhesives.

         WARREN E. BEAM, JR., CPA, 40, served as Treasurer and Controller of the
Company from January  1996 to January 26,  1998.  Mr. Beam was  Treasurer of Air
Resources  from  July 1994 to July  1996 and  Controller  from June 1993 to July
1996. Mr. Beam was Treasurer of Spurlock  Adhesives from January 1993 to January
1998 and Controller from October 1992 to January 1998.

         Management Appointments.  In connection with the resignations of Norman
Spurlock and Warren Beam  described  above,  the Company has  appointed  Kirk J.
Passopulo as Secretary of the Company and Lawrence C. Birkholz,  CPA, as Interim
Controller of the Company.

         Family  Relationships.  There are no family  relationships  between any
director and executive  officer,  except that Harold N. Spurlock,  a director of
the Company,  is the father of Irvine R. Spurlock,  an executive  officer of the
Company.  Harold N.  Spurlock is also the father of H. Norman  Spurlock,  Jr., a
former director and executive officer of the Company.

         Section 16(a) Beneficial Ownership Reporting Compliance.  Section 16(a)
of the  Securities  Exchange Act of 1934,  as amended,  requires  the  Company's
directors and executive  officers and persons who beneficially own more than 10%
of the Company's  Common Stock to file initial  reports of ownership and reports
of  changes  in  ownership  of Common  Stock with the  Securities  and  Exchange
Commission  (the   "Commission").   Such  persons  are  required  by  Commission
regulation  to furnish the Company  with copies of all Section  16(a) forms that
they file.

         To the Company's knowledge, based solely upon a review of the copies of
such reports  furnished to the Company,  the Company  believes  that  applicable
Section 16(a) filing  requirements  were  satisfied for events and  transactions
that occurred in 1997.


Item 11.          Executive Compensation

         The following table summarizes the compensation  paid or accrued to the
Chief Executive  Officer of the Company and its other most highly paid executive
officers  (the  "Named  Executive  Officers")  for the last  fiscal  year in all
capacities in which they served the Company.

                           Summary Compensation Table
<TABLE>
<CAPTION>

                                                                                                         Long Term
                                                                                                       Compensation
                                                                 Annual Compensation                       Award
                                                                 -------------------                       -----

                                                                                                         Securities
              Name and                                                            Other Annual           Underlying
         Principal Position             Year         Salary         Bonus         Compensation            Options
         ------------------             ----         ------         -----         ------------            -------

<S>                                     <C>         <C>          <C>                   <C>               <C>      
Phillip S. Sumpter, Chairman and        1997        $180,000         --                (3)                   --
  Chief Executive Officer (1)           1996 (2)    $141,942         --                (3)               50,000 (4)
                                        1995           --            --                --                    --

Irvine R. Spurlock, President (5)       1997        $186,725         --                (3)                   --
                                        1996        $179,880         --                (3)                   --
                                        1995        $186,725     $ 9,060 (6)           (3)               50,000 (4)

Harold N. Spurlock, Vice President      1997        $180,000      $ 50,000             (3)                   --
  of Spurlock Adhesives                 1996        $170,130      $ 50,000             (3)                   --
                                        1995        $194,500         --                (3)                   --

H. Norman Spurlock, Jr., Executive      1997        $182,000         --                (3)                   --
  Vice President and Secretary (7)      1996        $178,835         --                (3)                   --
                                        1995        $181,966     $ 9,060 (6)           (3)               50,000 (4)
</TABLE>
----------------
(1)      Mr.  Sumpter  was  elected  Chairman  of the Board and Chief  Executive
         Officer on February 11, 1998. During the fiscal year ended December 31,
         1997 and until February 11, 1998, he served as Executive Vice President
         and Chief Financial Officer.
(2)      Represents  compensation for Mr. Sumpter's  employment with the Company
         beginning April 1, 1996.
(3)      The value of perquisites and other personal benefits did not exceed the
         lesser of $50,000 or 10% of the total annual  salary and bonus shown in
         the table.
(4)      Represents  shares of Air Resources' common stock. As of July 26, 1996,
         these  options  were  automatically  converted  to options to  purchase
         shares of Common Stock.

                                      -40-
<PAGE>

(5)      Irvine  Spurlock  served as Chairman of the Board,  President and Chief
         Executive  Officer  during the fiscal year ended  December 31, 1997 and
         until  February 11, 1998. On February 11, 1998, he resigned as Chairman
         of the Board and Chief  Executive  Officer  but  retained  his title as
         President.
(6)      Award of 50,000 shares of Air  Resources'  common stock,  the per share
         fair  market  value of which was  $.1812  based on the  average  of the
         average bid and asked prices on the National Daily Quotation  Sheets on
         the date of award.
(7)      Norman Spurlock served as Executive Vice President and Secretary during
         the fiscal year ended December 31, 1997 and until his resignation  from
         the Company on January 23, 1998.


         The  executive  officers of the Company  participate  in other  benefit
plans  provided to all full-time  employees of the Company who meet  eligibility
requirements,  including group life insurance, hospitalization and major medical
insurance.

         Unauthorized Advances to Former Officers and Director. In early January
and early  February 1998,  the Company  discovered  that two of its officers and
directors,  Irvine  R.  Spurlock  and H.  Norman  Spurlock,  Jr.,  had  diverted
corporate  funds for personal use and that,  according to the Company's  Special
Litigation  Committee,  a third  officer,  Warren E. Beam,  had  colluded in the
diversions by Norman  Spurlock.  For further  information  on the  diversions of
corporate funds and the subsequent resignations of these officers and directors,
see Item 3., "Legal Proceedings" above.

         Option  Grants,  Exercises and Holdings.  The Company did not grant any
options to the Named Executive Officers named in the Summary  Compensation Table
during the fiscal year ended  December  31, 1997.  In addition,  no options were
exercised  by any of the Named  Executive  Officers  of the  Company  during the
fiscal year ended December 31, 1997.

         The following table sets forth  information with respect to unexercised
options held by the Named Executive Officers as of December 31, 1997:

                            Fiscal Year End Options

<TABLE>
<CAPTION>

                                              Number of Securities
                                             Underlying Unexercised                   Value of Unexercised
                                                   Options at                         In-the-Money Options
                                                 Fiscal Year End                     at Fiscal Year End (1)
                                                 ---------------                     ----------------------
Name                                     Exercisable       Unexercisable        Exercisable        Unexercisable
----                                     -----------       -------------        -----------        -------------

<S>                                        <C>                 <C>                   <C>                <C>
Phillip S. Sumpter                         50,000                -                   $0                  -

Irvine R. Spurlock                         50,000                -                   $0                  -

H. Norman Spurlock, Jr.                    50,000                -                   $0                  -
</TABLE>

(1)      The value of  unexercised  in-the-money  options at fiscal year end was
         calculated by determining the difference  between the fair market value
         of the Company's  Common Stock  underlying  the options on December 31,
         1997 per share and the exercise price of the options ($0.50 for Messrs.
         Spurlock and Spurlock and $0.55 for Mr. Sumpter).


         Compensation of Directors. The Company pays each director who is not an
employee of the Company $2,000 per meeting.

         In May  1997,  the  Company  created a  Special  Litigation  Committee,
consisting  of Messrs.  Tuttle  and  Whitwer,  to  investigate  the  allegations
contained in a  shareholders'  derivative  suit filed against the 

                                      -41-
<PAGE>


Company and to determine whether maintenance of the derivative proceeding was in
the best interests of the Company. Mr. Tuttle was paid $9,990 for his service on
the Special  Litigation  Committee in 1997. Mr. Whitwer was paid $29,523 for his
service on the Special  Litigation  Committee  in 1997,  and,  at Mr.  Whitwer's
request, the Company paid his compensation directly to Whitwer & Company,  Inc.,
a management  consulting firm owned by Mr. Whitwer.  For further  information on
the Special Litigation Committee and the shareholders' derivative suit, see Item
3., "Legal Proceedings," above.

         Employment Agreements.  The Company, Spurlock Adhesives and Mr. Sumpter
have entered into an employment  agreement  that provides for his  employment as
Chairman of the Board of Directors  and Chief  Executive  Officer of the Company
and Spurlock Adhesives. The term of the agreement commenced on April 1, 1998 and
will end on March 31,  2001,  when it will  automatically  renew for  successive
terms of one year each  unless it is  terminated  or not  renewed  by any party.
Under the agreement, Mr. Sumpter is entitled to receive annual base compensation
of $190,000,  subject to annual adjustments by the Company.  If the agreement is
terminated by the Company and Spurlock  Adhesives  without cause (as provided in
the  agreement),  Mr.  Sumpter  will  continue to receive his base  compensation
through the earlier of the last date of the remaining term of the agreement, the
date of his death or the date that is 18 months after such  termination.  If the
agreement  is  terminated  by Mr.  Sumpter  with good reason (as provided in the
agreement),  Mr. Sumpter will continue to receive his base compensation  through
the earlier of the last date of the remaining term of the agreement, the date of
his death or the date that is 12 months after such termination.  In the event of
a change of control of the Company and  Spurlock  Adhesives  (as provided in the
agreement),  Mr.  Sumpter will have the option to terminate his  employment  and
will be entitled  to receive a lump sum payment  equal to one and one half times
his total compensation under the agreement.

         The agreement  requires Mr. Sumpter to keep in confidence certain trade
secrets and  confidential  information  of the Company  and  Spurlock  Adhesives
during the term of his employment and for a period of five years thereafter. Mr.
Sumpter has  further  agreed not to remove or retain any  documents  of Spurlock
Adhesives.  Also,  for so long as Mr.  Sumpter is  employed  by the  Company and
Spurlock  Adhesives  and as long as he is receiving any  compensation  under the
agreement, he has agreed not to compete with the Company and Spurlock Adhesives.
In  connection  therewith,  Mr.  Sumpter has also agreed in the agreement not to
solicit  employees  of the Company  and  Spurlock  Adhesives  for a period of 12
months following termination of his employment for any reason.

         Pursuant to an  Agreement  and Plan of  Reorganization  dated April 22,
1992 (the "Spurlock Adhesives  Agreement"),  Air Resources,  among other things,
acquired all of the capital stock of Spurlock  Adhesives  from Harold  Spurlock.
The  Spurlock  Adhesives  Agreement  required  Air  Resources to purchase all of
Harold  Spurlock's shares of Air Resources' common stock at his request upon the
termination of his employment by Air Resources. The per share purchase price set
by the Spurlock  Adhesives  Agreement was the highest  market bid price at which
such shares have traded in the preceding twelve months.  The Spurlock  Adhesives
Agreement  also provided for Air Resources to purchase all of Harold  Spurlock's
shares of Air Resources' common stock upon his death at the request of his heirs
upon  mutually  agreeable  terms.  These  provisions  of the Spurlock  Adhesives
Agreement  relating to Air Resources'  obligations to purchase Harold Spurlock's
shares were terminated by mutual  agreement  effective  April 15, 1996,  without
compensation to Harold Spurlock.

         On August 21,  1996,  Harold  Spurlock  and the Company  entered into a
certain Employment and Retirement Benefit Agreement (the "Employment Agreement")
which provides, among other things, for Harold Spurlock's employment and certain
retirement benefits.  Pursuant to the Employment Agreement,  Harold Spurlock has
agreed to serve as vice  president for product  development,  and as a member of
the Company's Board of Directors, until August 31, 1999.

         For his services,  Harold  Spurlock  will receive under the  Employment
Agreement  a base  salary of  $180,000  per year,  reimbursement  of expenses in
accordance with the general policies of Spurlock Adhesives,  and such additional
or special  compensation  as the Board of  Directors of Spurlock  Adhesives 


                                      -42-
<PAGE>

may determine from time to time. Harold Spurlock will not receive any additional
compensation for service on the Company's Board of Directors.

         The Employment  Agreement  provides that Harold  Spurlock's  employment
with Spurlock  Adhesives  will be terminated by reason of his death or permanent
disability,  by Harold  Spurlock upon 30 days notice in writing,  or by Spurlock
Adhesives with cause.  "Cause" is deemed to exist under the Employment Agreement
if Harold Spurlock (i) willfully  refuses to perform services  thereunder,  (ii)
materially  breaches  the  provisions  thereof  relating to trade  secrets,  and
confidential  information,  retention of documents,  and  noncompetition,  (iii)
engages  in acts of  dishonesty  or  fraud,  or (iv)  engages  in other  serious
misconduct.  If Harold Spurlock's  employment with Spurlock Adhesives terminates
for cause, or due to death, permanent disability or voluntary  termination,  any
portion of his fixed  salary,  which is earned but unpaid as of the date of such
termination shall be paid to him, or his designated  beneficiary in the event of
death.

         The  Employment  Agreement  provides for a retirement  benefit equal to
$100,000 per year to be received by Harold  Spurlock  upon his  retirement  from
employment  at or after August 31, 1999, or permanent  disability  prior to such
date, for a period of five years. In the event of Harold  Spurlock's death prior
to or after such date,  Harold Spurlock's wife would receive such benefit during
such five year period. Any benefit payable to Harold Spurlock's wife would cease
upon her death.  Neither  Harold  Spurlock nor his wife would be entitled to any
retirement or death benefit under the Employment  Agreement in the event that he
voluntarily  terminated his employment  with Spurlock  Adhesives prior to August
31, 1999 without "good reason." Under the Employment Agreement, "good reason" is
deemed to exist if, and only if:

         (a)      Spurlock  Adhesives  generally fails to timely pay the amounts
and benefits provided to Harold Spurlock under the Employment Agreement;

         (b)      the  assignment  to  Harold  Spurlock  of  duties   materially
inconsistent  with and  inferior  to  Harold  Spurlock's  position,  duties  and
responsibilities and status as a vice president; or

         (c)      the transfer of Harold Spurlock's place of employment  further
than 30 miles  beyond  the  limits of  Petersburg,  Virginia  without  his prior
consent.

         The Employment Agreement requires Harold Spurlock to keep in confidence
certain trade secrets and confidential  information of Spurlock Adhesives during
the term of his  employment  and for a period of five years  thereafter.  Harold
Spurlock  has further  agreed not to remove or retain any  documents of Spurlock
Adhesives.  Also,  for so  long as  Harold  Spurlock  is  employed  by  Spurlock
Adhesives and as long as he is receiving retirement benefits,  he has agreed not
to compete with Spurlock Adhesives. In connection therewith, Harold Spurlock has
also agreed in the  Employment  Agreement  not to solicit  employees of Spurlock
Adhesives for a period of 12 months following  termination of his employment for
any reason.

         Bonus.  On June 11, 1996, the Board of Directors of Spurlock  Adhesives
resolved  to pay a bonus to Harold  Spurlock in the amount of $150,000 to reward
his past performance to Spurlock  Adhesives,  including its favorable  operating
performance in 1995 and  year-to-date  1996.  Such bonus was to be paid upon the
effectiveness of a new employment contract (described above), September 1, 1996.
Subsequently,  Spurlock Adhesives and Harold Spurlock agreed, in order to assist
the Company in managing its liquidity position, that such bonus be paid over the
next three  years at $50,000  per year.  The 1996  payment  was made in December
1996, as is reflected in the Summary  Compensation Table above. The 1997 payment
has been paid to Harold Spurlock periodically as an addition to his salary under
the Employment Agreement described above.

         Indemnification Agreements. On December 21, 1995, Air Resources entered
into an  Indemnification  Agreement with Phillip S. Sumpter upon his appointment
to the Board of Directors.  The Company  succeeded to and assumed all the rights
and obligations of Air Resources under the 

                                      -43-
<PAGE>

Indemnification   Agreement,   which  was  subsequently   superseded  by  a  new
Indemnification  Agreement between such parties dated January 30, 1997.  Similar
Indemnification  Agreements  were  entered  into between the Company and Glen S.
Whitwer  and  Raymond G. Tuttle on  September  19,  1996 and  January 30,  1997,
respectively.  Such agreements provide for the indemnification of such directors
against claims, losses,  liabilities,  damages, costs and expenses that each may
suffer as a result of his  service as a  director  of the  Company,  to the full
extent that such  indemnification  is permitted and not prohibited by applicable
federal or state law, including securities law, or the Articles of Incorporation
of the Company.

         Report  of the  Board  of  Directors  on  Executive  Compensation.  The
Company's  compensation  policies  applicable  to  its  executive  officers  are
administered  by the  Compensation  Committee  of the Board of  Directors,  both
member of which  are  non-employee  directors.  The goal of the  policies  is to
attract,  motivate,  reward and retain the management talent required to achieve
the Company's  business  objectives,  at compensation  levels which are fair and
equitable  and  competitive  with those of  comparable  companies.  This goal is
furthered  by  the  Board  of  Directors'  policy  of  linking  compensation  to
individual  and  corporate  performance  and by  encouraging  significant  stock
ownership by management in order to align the financial  interests of management
with those of the shareholders.

         The three main  components of executive  compensation  are base salary,
annual cash bonus awards, and equity  participation in the form of stock options
under the Company's 1995 Stock  Incentive Plan. Each year the Board of Directors
reviews the total compensation  package of each executive officer to ensure that
it  meets  the  above  described  goal.  As part of this  review,  the  Board of
Directors considers corporate performance information,  compensation survey data
and the recommendations of management.

         Base Salary. Base salaries for executive officers are reviewed annually
to determine  whether  adjustments may be necessary.  Factors  considered by the
Board of Directors in determining  base salaries for executive  officers include
personal  performance of the executive  officer in light of individual levels of
responsibility,  the overall performance and profitability of the Company during
the preceding year,  economic trends that may be affecting the Company,  and the
competitiveness of the executive officer's salary with the salaries of executive
officers in comparable  positions at companies of comparable size or operational
characteristics.  Each  factor  is  weighed  in a  subjective  analysis  of  the
appropriate level of compensation for that executive officer.

         Irvine R.  Spurlock  served  as  Chairman  of the  Board of  Directors,
President  and Chief  Executive  Officer of the  Company  during the fiscal year
ended  December 31, 1997. Mr.  Spurlock's  base salary for the fiscal year ended
December 31, 1997 was $186,725.  The salary was set following a thorough  review
and evaluation by the Board of Directors of Mr. Spurlock's personal  performance
in light of his management  responsibilities,  the level of profitability of the
Company during the fiscal year ended December 31, 1996, and the  competitiveness
of Mr.  Spurlock's  salary  to  those  of  other  chief  executive  officers  in
comparable companies.

         Bonus Awards. The Company from time to time will award to its executive
officers  bonuses  in the  form of cash  and/or  shares  of  Common  Stock.  The
determination  of such  bonus  awards is made by the Board of  Directors  and is
generally based on the same factors used to determine base salary,  as described
above.  Particular attention is given to those executive officers who contribute
in a substantial degree to the success of the Company.

         1995  Stock   Incentive   Plan.   The   incentive   plan  provides  for
administration  by a  committee,  which  shall  include  at  least  two  outside
directors,  or, if no committee is designated by the Board of Directors,  by the
Board of  Directors.  On November  20, 1997,  the Board of  Directors  created a
Compensation Committee and designated it to administer the plan.

         The shareholder-approved  incentive plan is designed to provide current
and deferred incentive compensation to officers,  directors and key employees of
the  Company  who  contribute  in a  substantial  degree to the  success  of the
Company.  The  incentive  plan affords  these  selected  individuals  a means of


                                      -44-
<PAGE>

participating  in, and an  incentive  to  contribute  further to, such  success.
Grants  are made to  executive  officers  based on  salary,  responsibility  and
performance of the individual officer, director or employee.

         The exercise  price per share for options  granted  under the incentive
plan is determined by the Board of Directors on the date of grant. Under certain
circumstances,  the exercise  price shall not be less than the fair market value
of Common Stock on the date of grant.  Accordingly,  if there is no appreciation
in the market price for Common Stock, the options are valueless. The term of any
option  granted under the  incentive  plan is fixed by the Board of Directors on
the date of grant.

         Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, applicable for 1995 and thereafter,  generally
disallows a tax deduction to public companies for  compensation  over $1 million
paid in any year (not including amounts deferred) to a company's chief executive
officer  and to the four  other most  highly  compensated  officers.  Qualifying
performance-based  compensation  will not be subject to the  deduction  limit if
certain requirements are met. The Company believes that all compensation paid in
1997  to  such  officers  is  deductible   under  Section  162(m)  because  such
compensation  is less than the  threshold  amount and is  structured in a manner
believed  to  qualify  as  performance-based  compensation  not  subject  to the
deduction limit.

                                                 Board of Directors

                                                 Phillip S. Sumpter, Chairman
                                                 Harold N. Spurlock
                                                 Raymond G. Tuttle
                                                 Glen S. Whitwer


         Compensation Committee Interlocks and Insider  Participation.  Prior to
November 20 1997, executive compensation was examined and approved by the entire
Board of  Directors.  On November  20, 1997,  the Board of  Directors  created a
compensation committee,  consisting of the outside directors, Messrs. Tuttle and
Whitwer. Executive compensation is now examined and approved by the Compensation
Committee,  which  then makes  recommendations  to the Board of  Directors.  The
entire Board of Directors must approve  executive  compensation.  For the fiscal
year ended  December 31, 1997,  the Board of  Directors  included the  following
officers  and  employees  of  the  Company  and/or   Spurlock   Adhesives,   who
participated in  deliberations  of the Board of Directors  concerning  executive
officer  compensation:  Harold N. Spurlock,  H. Norman Spurlock,  Jr., Irvine R.
Spurlock and Phillip S. Sumpter. There were no changes in executive compensation
during 1997.

         Performance Graph. Set forth below is a line graph comparing the yearly
percentage  change  in  the  Company's   cumulative  total  shareholder   return
(including  reinvestment  of  dividends)  on the Common Stock with (a) the S&P's
SmallCap  600  Index,   representing   a  broad  equity  market  index  assuming
reinvestment  of  dividends,   and  (b)  a  cumulative  total  return,  assuming
reinvestment  of  dividends,  of a peer  group  selected  by the  Company  on an
industry and  line-of-business  basis (the "Peer Group"),  in each case assuming
that $100 is invested on December 31, 1992.

[The  Performance  Graph is a line graph which displays the indexed  returns (in
dollars) set forth in the second table below entitled "Indexed Returns($)."]

                                      -45-
<PAGE>


         Set forth below are the annual return percentages and index returns for
the S&P SmallCap 600 Index, the Peer Group and for the Company,  as presented in
the Performance Graph above. The shareholder  returns shown in the graph and the
table are not necessarily indicative of future performance.

Total Shareholder Returns (Dividends Reinvested)

                            ANNUAL RETURN PERCENTAGE
                            Years Ending December 31
<TABLE>
<CAPTION>

Company Name/Index                         1993            1994            1995            1996            1997
------------------                         ----            ----            ----            ----            ----

<S>                                        <C>             <C>             <C>             <C>             <C>   
S&P SmallCap 600 Index                     18.79%          - 4.77%          29.96%         21.32%           23.97%
Peer Group                                 46.05%           39.84%          31.66%        - 8.56%           15.30%
Spurlock Industries, Inc.                 -93.18%            0.00%         333.39%          0.83%          - 0.53%
</TABLE>


                               INDEXED RETURNS ($)
                            Years Ending December 31

<TABLE>
<CAPTION>
                                         Base
                                        Period
Company Name/Index                       1992         1993          1994         1995          1996         1997
------------------                       ----         ----          ----         ----          ----         ----

<S>                                      <C>          <C>          <C>           <C>          <C>           <C>   
S&P SmallCap 600 Index                   121.04       143.78       136.92        177.95       215.89        267.64
Peer Group                                97.68       142.66       199.50        262.66       240.18        276.93
Spurlock Industries, Inc.                183.33        12.50        12.50         54.17        53.72         53.44
</TABLE>


         The Peer Group companies include ChemFirst Inc., Geon Company (included
from 1994 forward) and Mississippi  Chemical Corp. (included from 1994 forward).
These  companies were selected by the Company  because they are generally in the
same industry and line of business as the Company.


Item 12.          Security Ownership of Certain Beneficial Owners and Management

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of Common  Stock as of March 31, 1998,  by (i) each person
who is known to the  Company to be the  beneficial  owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
Company's "Named Executive Officers" set forth in the Summary Compensation Table
as  disclosed  in Item 11 above,  and (iv) all of the  directors  and  executive
officers of the Company as a group.  For the  purposes of the  following  table,
beneficial  ownership has been  determined in accordance  with the provisions of
Rule 13d-3 under the Exchange Act, under which,  in general,  a person is deemed
to be a  beneficial  owner of a security if he or she has or shares the power to
vote or direct  the  voting of the  security  or the power to  dispose or direct
disposition of the security, or if he or she has the right to acquire beneficial
ownership of the security within 60 days. Except as otherwise indicated (i) each
shareholder  identified in the table possesses sole voting and investment  power
with respect to his shares,  


                                      -46-
<PAGE>

and (ii) the mailing  address of each individual is Spurlock  Industries,  Inc.,
209 West Main Street, Waverly, Virginia 23890.

<TABLE>
<CAPTION>

Name and Address of                                        Common Stock
Beneficial Owner                                        Beneficially Owned             Percent of Class*
----------------                                        ------------------             -----------------
<S>                                                           <C>                              <C> 
Phillip S. Sumpter (1)                                           80,000                         1.9
Irvine R. Spurlock (2)(3)(4)                                  3,434,800                        51.5
Harold N. Spurlock (2)                                        3,670,800                        54.6
H. Norman Spurlock, Jr. (2)(3)(4)                             3,414,800                        51.1
 1706 Westover Avenue
 Petersburg, VA  23805
Raymond G. Tuttle                                                     0                           0
Glen S. Whitwer                                                       0                           0
Lee Rasmussen                                                   346,283                         5.1
   14945 E. Radcliffe Drive
   Aurora, CO  80015
Executive officers and
  directors as a group (four persons)                         3,900,800                        58.9
</TABLE>
-----------------
*Based on 6,527,066 shares of Common Stock outstanding at March 31, 1998.

(1)      Includes  options to purchase 50,000 shares of Common Stock at $.55 per
         share pursuant to the 1995 Stock Incentive Plan and 30,000 shares owned
         by Mr. Sumpter's spouse.
(2)      Includes beneficial  ownership of 3,364,800 shares held by the Spurlock
         Family Limited Partnership (the "Partnership").  The general partner of
         the Partnership is the Spurlock Family Corporation, control of which at
         March  31,  1998 was held 1/3 each by  Harold  N.  Spurlock,  Irvine R.
         Spurlock and H. Norman Spurlock,  Jr.  Effective April 8, 1998,  Norman
         Spurlock resigned as an officer and a director of, and relinquished all
         interest in, the Spurlock Family Corporation.
(3)      Pursuant to an agreement  between Lloyd B. Putman,  H. Norman Spurlock,
         Jr. and Irvine R. Spurlock,  dated January 12, 1996,  Irvine and Norman
         Spurlock each purchased  507,400 shares of Air Resources'  common stock
         from Mr.  Putman in  consideration  of a joint  promissory  note due in
         installments  ending May 2000.  In accordance  with the stock  purchase
         agreement,  the shares  purchased have been pledged as security for the
         promissory  note, but Irvine and Norman Spurlock  retained the right to
         vote their  respective  shares  until an event of  default  thereunder.
         Irvine  and  Norman  Spurlock   transferred  all  such  shares  to  the
         Partnership in 1996.
(4)      Includes  options to purchase 50,000 shares of Common Stock at $.50 per
         share  pursuant to the 1995 Stock  Incentive  Plan. The options held by
         Norman Spurlock expire April 23, 1998.


Item 13.          Certain Relationships and Related Transactions

         Certain  Related  Transactions.  In May  1997,  the  Company  created a
Special  Litigation  Committee,  consisting  of Messrs.  Tuttle and Whitwer,  to
investigate the allegations  contained in a shareholders'  derivative suit filed
against the Company  and to  determine  whether  maintenance  of the  derivative
proceeding was in the best interests of the Company.  Mr. Tuttle was paid $9,990
for his service on the Special  Litigation  Committee in 1997.  Mr.  Whitwer was
paid $29,523 for his service on the Special  Litigation  Committee in 1997, and,
at Mr. Whitwer's request, the Company paid his compensation  directly to Whitwer
& Company,  Inc., a management consulting firm owned by Mr. Whitwer. For further
information on the Special Litigation Committee and the shareholders' derivative
suit, see Item 3., "Legal Proceedings," above.

         Unauthorized Advances to Former Officers and Director. In early January
and early  February 1998,  the Company  discovered  that two of its officers and
directors,  Irvine  R.  Spurlock  and H.  Norman  Spurlock,  Jr.,  had  diverted
corporate  funds for personal use and that,  according to the Company's  Special
Litigation  Committee,  a third  officer,  Warren E. Beam,  had  colluded in the
diversions by Norman  

                                      -47-
<PAGE>

Spurlock.  For further  information on the diversions of corporate funds and the
subsequent  resignations  of these officers and  directors,  see Item 3., "Legal
Proceedings" above.

         Indebtedness of Management.  On June 30, 1995, Harold N. Spurlock, then
Chairman of the Board,  President  and Chief  Executive  Officer of the Company,
received a loan in the amount of $112,500 from Spurlock Adhesives. Principal and
interest  at 9.0% per  annum  are  payable  in five  equal  annual  installments
commencing  in July  1996,  the first of which was paid as agreed.  The  largest
aggregate amount of such debt outstanding  during 1997 was $82,500.  The balance
as of December  31, 1997 was  $60,483.  The loan  relates to the purchase by Mr.
Spurlock  of  certain  manufacturing  assets  in  Malvern,  Arkansas  that  were
contributed by Mr. Spurlock to Air Resources  pursuant to the Spurlock Adhesives
Agreement.

         In  1993,  Harold  N.  Spurlock  received  advances  in  the  aggregate
principal amount of $126,000 from Spurlock Adhesives.  On December 21, 1993, the
Board of  Directors  of Spurlock  Adhesives  approved  the  purchase by Spurlock
Adhesives of a parcel of land owned by Harold Spurlock that adjoins its Waverly,
Virginia plant, at a price equal to the total amount of the advances ($126,000).
Such  property was  purchased by Mr.  Spurlock on June 14, 1989 in a transaction
from Lone Star, Inc. for $150,000.

         Subsequently,  on March 15, 1994, the purchase transaction was modified
because  the  property  was found to be  subject  to a  $130,000  mortgage.  The
modified  transaction  entailed the assignment of all of Mr.  Spurlock's  right,
title and  interest in the  property to Spurlock  Adhesives  in exchange for the
assumption by Spurlock  Adhesives of the $130,000  mortgage loan, plus a $20,000
reduction in the $126,000 of advances made to Mr.  Spurlock.  At this point, the
balance of the advances totalled approximately $106,000.

         Subsequent to December 31, 1993,  the financial  records of the Company
do not reflect the advances to Mr.  Spurlock,  or any payments  made or interest
charged thereon. In October,  1997, these advances were discovered as unpaid and
unrecognized.  The advances were then  recognized in the amount of $97,633,  Mr.
Spurlock  was  notified  and such  remaining  amount  repaid by Mr.  Spurlock on
October 15, 1997.


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a)      (1)      Financial Statements:

                           (i)      Independent Auditors' Report
                           (ii)     Consolidated  Balance  Sheets as of December
                                    31, 1997 and 1996
                           (iii)    Consolidated  Statements of  Operations  for
                                    the years ended December 31, 1997,  1996 and
                                    1995
                           (iv)     Consolidated   Statements  of  Stockholders'
                                    Equity  for the  years  ended  December  31,
                                    1997, 1996 and 1995
                           (v)      Consolidated  Statements  of Cash  Flows for
                                    the years ended December 31, 1997,  1996 and
                                    1995
                           (vi)     Notes to Consolidated Financial Statements

                  (2)      Financial Statement Schedules:  none.

                  (3)      Exhibits


                                      -48-
<PAGE>

    Exhibit No.                Document

         2        Agreement and Plan of Merger dated February 15, 1996,  between
                  Air  Resources  Corporation  and  Spurlock  Industries,  Inc.,
                  incorporated  by reference to Exhibit 2 to the Form S-4 of the
                  Registrant  filed with the Securities and Exchange  Commission
                  on February 20, 1996,  as amended by Amendment No. 1 and No. 2
                  thereto,  Registration  No.  33-01448 (as  amended,  the "Form
                  S-4").

         3.1      Articles  of  Incorporation  of  Spurlock  Industries,   Inc.,
                  incorporated by reference to Exhibit 3.1 to the Form S-4.

         3.2      Bylaws of Spurlock Industries, Inc., incorporated by reference
                  to Exhibit 3.2 to the Form S-4.

         10.1     Agreement  and Plan of  Reorganization,  dated April 22, 1992,
                  between Air  Resources  Corporation  and  Spurlock  Adhesives,
                  Inc.,  incorporated  by  reference to Exhibit 10.1 to the Form
                  S-4.

         10.2     Employment and Retirement  Benefit  Agreement dated August 21,
                  1996 by and between  Spurlock  Adhesives,  Inc.  and Harold N.
                  Spurlock, as amended by First Amendment thereto dated February
                  24,  1997  by  and  between  such  parties,   incorporated  by
                  reference  to Exhibit 10.2 to the  Registrant's  Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.3     Air  Resources   Corporation   1995  Stock   Incentive   Plan,
                  incorporated by reference to Exhibit 10.3 to the Form S-4.

         10.4     Incentive  Stock Option  Agreement,  dated  February 22, 1995,
                  between  Air  Resources  Corporation  and Irvine R.  Spurlock,
                  incorporated by reference to Exhibit 10.4 to the Form S-4.

         10.5     Incentive  Stock Option  Agreement,  dated  February 22, 1995,
                  between Air Resources Corporation and H. Norman Spurlock, Jr.,
                  incorporated by reference to Exhibit 10.5 to the Form S-4.

         10.6     Incentive Stock Option Agreement,  dated May 15, 1995, between
                  Air Resources Corporation and Warren E. Beam,  incorporated by
                  reference to Exhibit 10.6 to the Form S-4.

         10.7     Indemnification  Agreement,  dated  January 30, 1997,  between
                  Spurlock Industries, Inc. and Phillip S. Sumpter, incorporated
                  by reference to Exhibit 10.7 to the Registrant's Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.8     Promissory  Note made by H. Norman  Spurlock,  Jr. in favor of
                  Spurlock Adhesives,  Inc. as of January 10, 1996, incorporated
                  by reference to Exhibit 10.8 to the Form S-4.

         10.9     Letter   Agreement  dated  September  7,  1993,   between  Air
                  Resources  Corporation  and Lloyd B. Putman,  incorporated  by
                  reference to Exhibit 10.9 to the Form S-4.

         10.10    Collateral Promissory Note made by Harold N. Spurlock in favor
                  of Spurlock Adhesives,  Inc. as of June 30, 1995, incorporated
                  by reference to Exhibit 10.10 to the Form S-4.


                                      -49-
<PAGE>

         10.11    Indemnification  Agreement,  dated September 19, 1996, between
                  Spurlock Industries, Inc. and Glen S. Whitwer, incorporated by
                  reference to Exhibit 10.11 to the  Registrant's  Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.12    Indemnification  Agreement,  dated  January 30,  1997  between
                  Spurlock Industries,  Inc. and Raymond G. Tuttle, incorporated
                  by reference to Exhibit  10.12 to the  Registrant's  Form 10-K
                  for  the  year  ended  December  31,  1996,   filed  with  the
                  Securities and Exchange Commission on March 31, 1997.

         10.13    Loan and  Security  Agreement,  dated  July 1,  1996,  between
                  Spurlock   Adhesives,   Inc.  and  National   Canada   Finance
                  Corporation,  incorporated  by  reference to Exhibit 10 to the
                  Registrant's  Form 10-Q for the quarter  ended June 30,  1996,
                  filed with the  Securities  and Exchange  Commission on August
                  15, 1996.

         10.14    Spurlock   Industries,   Inc.  1995  Stock   Incentive   Plan,
                  incorporated  by reference to Exhibit 4.3 of the  Registrant's
                  Registration Statement on Form S-8, File No. 333-09659.

         10.15    Form of Spurlock  Industries,  Inc.,  Incentive  Stock  Option
                  Agreement,  incorporated  by  reference to Exhibit 10.2 to the
                  Registrant's  Form 10-Q for the quarter  ended  September  30,
                  1996,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1996.

         10.16    Form of Spurlock Industries,  Inc.  Non-Qualified Stock Option
                  Agreement,  incorporated  by  reference to Exhibit 10.3 to the
                  Registrant's  Form 10-Q for the quarter  ended  September  30,
                  1996,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1996.

         10.17    Letter agreement between Spurlock Adhesives,  Inc. and KeyBank
                  of New York dated August 4, 1997, incorporated by reference to
                  Exhibit  10.1 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.18    Promissory Note dated August 13, 1997 from Spurlock Adhesives,
                  Inc. payable to KeyBank of New York, incorporated by reference
                  to Exhibit 10.2 to the Registrant's  Form 10-Q for the quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.19    HCHO/UFC  Turnkey Plant "B" Sale Contract - Design,  Engineer,
                  Equipment  Supply,   Construct,  and  Install  Contract  dated
                  September 30, 1997 between Spurlock  Adhesives,  Inc. and D.B.
                  Western,  Inc.,  incorporated  by reference to Exhibit 10.3 to
                  the Registrant's Form 10-Q for the quarter ended September 30,
                  1997,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1997.

         10.20    HCHO/UFC  Plant "A" - Lease dated  September  30, 1997 between
                  Spurlock Adhesives,  Inc. and D.B. Western, Inc., incorporated
                  by reference to Exhibit 10.4 to the Registrant's Form 10-Q for
                  the  quarter  ended   September  30,  1997,   filed  with  the
                  Securities and Exchange Commission on November 14, 1997.

         10.21    Guaranty dated September 1, 1997 of Spurlock Industries,  Inc.
                  in favor of D.B. Western,  Inc.,  incorporated by reference to
                  Exhibit  10.5 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.


                                      -50-
<PAGE>

         10.22    Guaranty dated September 1, 1997 of Spurlock Industries,  Inc.
                  in favor of D.B. Western,  Inc.,  incorporated by reference to
                  Exhibit  10.6 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.23    Guaranty  of Payment  dated  September  30,  1997 of Irvine R.
                  Spurlock for the benefit of D.B. Western,  Inc.,  incorporated
                  by reference to Exhibit 10.7 to the Registrant's Form 10-Q for
                  the  quarter  ended   September  30,  1997,   filed  with  the
                  Securities and Exchange Commission on November 14, 1997.

         10.24    Indenture  dated August 13, 1997  between Town of Moreau,  New
                  York as grantor  and  Spurlock  Adhesives,  Inc.  as  grantee,
                  incorporated by reference to Exhibit 10.8 to the  Registrant's
                  Form 10-Q for the quarter ended September 30, 1997, filed with
                  the Securities and Exchange Commission on November 14, 1997.

         10.25    Indenture  dated August 13, 1997  between Town of Moreau,  New
                  York,  as grantor  and  Spurlock  Adhesives,  Inc. as grantee,
                  incorporated by reference to Exhibit 10.9 to the  Registrant's
                  Form 10-Q for the quarter ended September 30, 1997, filed with
                  the Securities and Exchange Commission on November 14, 1997.

         10.26    Employment Agreement by and between Spurlock Industries, Inc.,
                  Spurlock Adhesives  Incorporated [sic] and Phillip S. Sumpter,
                  dated as of March  11,  1996,  incorporated  by  reference  to
                  Exhibit 10.17 to Amendment No. 4 to the Registrant's Form 10-K
                  for  the  year  ended  December  31,  1996,   filed  with  the
                  Securities and Exchange Commission on April 16, 1998.

         10.27*   Employment Agreement by and between Spurlock Industries, Inc.,
                  Spurlock Adhesives,  Inc. and Phillip S. Sumpter,  dated as of
                  April 1, 1998.

         10.28*   Deed, dated October 9, 1997, between Spurlock Adhesives, Inc.,
                  as Grantor, and the County of Saratoga Industrial  Development
                  Agency, as Grantee.

         10.29*   Bill of Sale, dated October 1, 1997, from Spurlock  Adhesives,
                  Inc., to the County of Saratoga Industrial Development Agency.

         10.30*   Trust Indenture,  dated October 1, 1997, between the County of
                  Saratoga Industrial Development Agency and Star Bank, N.A.

         10.31*   Installment Sale Agreement, dated October 1, 1997, between the
                  County of Saratoga Industrial  Development Agency and Spurlock
                  Adhesives, Inc.

         10.32*   Irrevocable  Transferable  Direct Pay Letter of Credit No. NSL
                  792132,   dated  October  10,  1997,  from  KeyBank   National
                  Association in favor of Star Bank, N.A.

         10.33*   Letter of Credit  Reimbursement  Agreement,  dated  October 1,
                  1997,  between Spurlock  Adhesives,  Inc. and KeyBank National
                  Association.

         10.34*   Pledge and Assignment,  dated October 1, 1997, from the County
                  of Saratoga Industrial Development Agency to Star Bank, N.A.



                                      -51-
<PAGE>

         10.35*   Mortgage and Security  Agreement,  dated October 1, 1997, from
                  the  County of  Saratoga  Industrial  Development  Agency  and
                  Spurlock Adhesives, Inc. to KeyBank National Association.

         10.36*   Security  Agreement,  dated October 1, 1997,  between Spurlock
                  Adhesives,  Inc., as Debtor, and KeyBank National Association,
                  as Secured Party.

         10.37*   Guaranty of Payment and  Performance,  dated  October 1, 1997,
                  from   Spurlock   Industries,   Inc.,   to  KeyBank   National
                  Association.

         10.38*   Remarketing  Agreement,  dated October 1, 1997, among Spurlock
                  Adhesives,  Inc., KeyBank National  Association and the County
                  of Saratoga Industrial Development Agency.

         10.39*   Pledge and Security Agreement,  dated October 1, 1997, between
                  Spurlock Adhesives, Inc. and KeyBank National Association.

         10.40*   Payment  in Lieu of Tax  Agreement,  dated  October  1,  1997,
                  between the County of Saratoga  Industrial  Development Agency
                  and Spurlock Adhesives, Inc.

         10.41*   Building Loan Agreement,  dated October 1, 1997, among KeyBank
                  National Association,  Spurlock Adhesives, Inc. and the County
                  of Saratoga Industrial Development Agency.

         10.42*   Tax  Regulatory  Agreement,   dated  October  10,  1997,  from
                  Spurlock  Adhesives,  Inc.,  for the  benefit of the County of
                  Saratoga Industrial Development Agency and Star Bank, N.A.

         10.43*   Deed of Trust and Security  Agreement,  dated October 1, 1997,
                  from Spurlock  Adhesives,  Inc. to Otto W. Konrad and Bruce H.
                  Matson,  as  collective  Trustee,  for the  benefit of KeyBank
                  National Association.

         10.44*   Hazardous  Substances  Indemnity  Agreement,  dated October 1,
                  1997, by Spurlock  Adhesives,  Inc., and Spurlock  Industries,
                  Inc., for the benefit of KeyBank National Association.

         10.45*   Guaranty,  dated October 1, 1997,  from  Spurlock  Industries,
                  Inc., to the County of Saratoga Industrial Development Agency.

         10.46*   Performance Bond No. 644927,  dated October 9, 1997, issued by
                  Nobel Insurance Company, as Surety, on behalf of D.B. Western,
                  Inc.,  as  Principal,  for the benefit of Spurlock  Adhesives,
                  Inc., Key Bank and National Bank of Canada, as the Obligees.

         10.47*   Promissory   Note,  dated  October  10,  1997,  from  Spurlock
                  Adhesives, Inc., payable to KeyBank National Association.

         10.48*   Settlement  Agreement,  dated  April 8, 1998,  among  Spurlock
                  Industries,  Inc., Spurlock  Adhesives,  Inc., Spurlock Family
                  Limited  Partnership,  H. Norman  Spurlock,  Jr. and Harold N.
                  Spurlock, Sr.

         10.49*   Unconditional  Guaranty,  dated April 8, 1998, given by Harold
                  N. Spurlock, Sr., to Spurlock Adhesives, Inc.

                                      -52-
<PAGE>

         10.50*   Pledge and Security  Agreement,  dated April 8, 1998,  between
                  Spurlock   Adhesives,   Inc.,  and  Spurlock   Family  Limited
                  Partnership.

         10.51*   Promissory  Note,  dated April 8, 1998,  from Spurlock  Family
                  Limited Partnership, payable to Spurlock Adhesives, Inc.

         21*      Subsidiaries of the Registrant.

         23.1*    Consent of Cherry, Bekaert & Holland, L.L.P.

         23.2*    Consent of James E.  Scheifley &  Associates,  P.C.  (formerly
                  Winter, Scheifley & Associates, P.C.), independent auditors

         27*      Financial Data Schedule (filed electronically only).


*  Filed herewith.

         (b)      Reports on Form 8-K.

                  None.

         (c)      The exhibits  required by Item 601 of Regulation S-K are filed
as exhibits to this Form 10-K.

         (d)      There are no financial  statements of the Company  required by
Regulation  S-X which were excluded from the Annual  Report to  Shareholders  by
Rule 14a-3(b).



                                      -53-
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                   SPURLOCK INDUSTRIES, INC.



Date:  April 15, 1998              By:      /s/ Phillip S. Sumpter
                                       ---------------------------
                                          Phillip S. Sumpter
                                          Chairman and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>


                  Signature                                       Title                              Date
                  ---------                                       -----                              ----



<S>                                            <C>                                              <C>
          /s/ Phillip S. Sumpter                      Chairman and Chief Executive              April 15, 1998
-------------------------------------------     Officer and Director (Principal Executive
             Phillip S. Sumpter                           and Financial Officer)
                                            

         /s/ Lawrence C. Birkholz                              Controller                       April 15, 1998
-------------------------------------------          (Principal Accounting Officer)
            Lawrence C. Birkholz           


          /s/ Harold N. Spurlock                                Director                        April 15, 1998
-------------------------------------------
             Harold N. Spurlock


           /s/ Raymond G. Tuttle                                Director                        April 15, 1998
-------------------------------------------
              Raymond G. Tuttle


            /s/ Glen S. Whitwer                                 Director                        April 15, 1998
-------------------------------------------
               Glen S. Whitwer

</TABLE>






                                      -54-
<PAGE>



                                INDEX TO EXHIBITS

    Exhibit No.                Document

         2        Agreement and Plan of Merger dated February 15, 1996,  between
                  Air  Resources  Corporation  and  Spurlock  Industries,  Inc.,
                  incorporated  by reference to Exhibit 2 to the Form S-4 of the
                  Registrant  filed with the Securities and Exchange  Commission
                  on February 20, 1996,  as amended by Amendment No. 1 and No. 2
                  thereto,  Registration  No.  33-01448 (as  amended,  the "Form
                  S-4").

         3.1      Articles  of  Incorporation  of  Spurlock  Industries,   Inc.,
                  incorporated by reference to Exhibit 3.1 to the Form S-4.

         3.2      Bylaws of Spurlock Industries, Inc., incorporated by reference
                  to Exhibit 3.2 to the Form S-4.

         10.1     Agreement  and Plan of  Reorganization,  dated April 22, 1992,
                  between Air  Resources  Corporation  and  Spurlock  Adhesives,
                  Inc.,  incorporated  by  reference to Exhibit 10.1 to the Form
                  S-4.

         10.2     Employment and Retirement  Benefit  Agreement dated August 21,
                  1996 by and between  Spurlock  Adhesives,  Inc.  and Harold N.
                  Spurlock, as amended by First Amendment thereto dated February
                  24,  1997  by  and  between  such  parties,   incorporated  by
                  reference  to Exhibit 10.2 to the  Registrant's  Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.3     Air  Resources   Corporation   1995  Stock   Incentive   Plan,
                  incorporated by reference to Exhibit 10.3 to the Form S-4.

         10.4     Incentive  Stock Option  Agreement,  dated  February 22, 1995,
                  between  Air  Resources  Corporation  and Irvine R.  Spurlock,
                  incorporated by reference to Exhibit 10.4 to the Form S-4.

         10.5     Incentive  Stock Option  Agreement,  dated  February 22, 1995,
                  between Air Resources Corporation and H. Norman Spurlock, Jr.,
                  incorporated by reference to Exhibit 10.5 to the Form S-4.

         10.6     Incentive Stock Option Agreement,  dated May 15, 1995, between
                  Air Resources Corporation and Warren E. Beam,  incorporated by
                  reference to Exhibit 10.6 to the Form S-4.

         10.7     Indemnification  Agreement,  dated  January 30, 1997,  between
                  Spurlock Industries, Inc. and Phillip S. Sumpter, incorporated
                  by reference to Exhibit 10.7 to the Registrant's Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.8     Promissory  Note made by H. Norman  Spurlock,  Jr. in favor of
                  Spurlock Adhesives,  Inc. as of January 10, 1996, incorporated
                  by reference to Exhibit 10.8 to the Form S-4.

         10.9     Letter   Agreement  dated  September  7,  1993,   between  Air
                  Resources  Corporation  and Lloyd B. Putman,  incorporated  by
                  reference to Exhibit 10.9 to the Form S-4.

         10.10    Collateral Promissory Note made by Harold N. Spurlock in favor
                  of Spurlock Adhesives,  Inc. as of June 30, 1995, incorporated
                  by reference to Exhibit 10.10 to the Form S-4.

         10.11    Indemnification  Agreement,  dated September 19, 1996, between
                  Spurlock Industries, Inc. and Glen S. Whitwer, incorporated by
                  reference to Exhibit 10.11 to the  Registrant's  Form 10-K for
                  the year ended  December 31, 1996,  filed with the  Securities
                  and Exchange Commission on March 31, 1997.

         10.12    Indemnification  Agreement,  dated  January 30,  1997  between
                  Spurlock Industries,  Inc. and Raymond G. Tuttle, incorporated
                  by reference to Exhibit  10.12 to the  Registrant's  Form 10-K
                  for  the  year  ended  December  31,  1996,   filed  with  the
                  Securities and Exchange Commission on March 31, 1997.

         10.13    Loan and  Security  Agreement,  dated  July 1,  1996,  between
                  Spurlock   Adhesives,   Inc.  and  National   Canada   Finance
                  Corporation,  incorporated  by  reference to Exhibit 10 to the
                  Registrant's  Form 10-Q for the quarter  ended June 30,  1996,
                  filed with the  Securities  and Exchange  Commission on August
                  15, 1996.

         10.14    Spurlock   Industries,   Inc.  1995  Stock   Incentive   Plan,
                  incorporated  by reference to Exhibit 4.3 of the  Registrant's
                  Registration Statement on Form S-8, File No. 333-09659.

         10.15    Form of Spurlock  Industries,  Inc.,  Incentive  Stock  Option
                  Agreement,  incorporated  by  reference to Exhibit 10.2 to the
                  Registrant's  Form 10-Q for the quarter  ended  September  30,
                  1996,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1996.

         10.16    Form of Spurlock Industries,  Inc.  Non-Qualified Stock Option
                  Agreement,  incorporated  by  reference to Exhibit 10.3 to the
                  Registrant's  Form 10-Q for the quarter  ended  September  30,
                  1996,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1996.

         10.17    Letter agreement between Spurlock Adhesives,  Inc. and KeyBank
                  of New York dated August 4, 1997, incorporated by reference to
                  Exhibit  10.1 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.18    Promissory Note dated August 13, 1997 from Spurlock Adhesives,
                  Inc. payable to KeyBank of New York, incorporated by reference
                  to Exhibit 10.2 to the Registrant's  Form 10-Q for the quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.19    HCHO/UFC  Turnkey Plant "B" Sale Contract - Design,  Engineer,
                  Equipment  Supply,   Construct,  and  Install  Contract  dated
                  September 30, 1997 between Spurlock  Adhesives,  Inc. and D.B.
                  Western,  Inc.,  incorporated  by reference to Exhibit 10.3 to
                  the Registrant's Form 10-Q for the quarter ended September 30,
                  1997,  filed with the  Securities  and Exchange  Commission on
                  November 14, 1997.

         10.20    HCHO/UFC  Plant "A" - Lease dated  September  30, 1997 between
                  Spurlock Adhesives,  Inc. and D.B. Western, Inc., incorporated
                  by reference to Exhibit 10.4 to the Registrant's Form 10-Q for
                  the  quarter  ended   September  30,  1997,   filed  with  the
                  Securities and Exchange Commission on November 14, 1997.

         10.21    Guaranty dated September 1, 1997 of Spurlock Industries,  Inc.
                  in favor of D.B. Western,  Inc.,  incorporated by reference to
                  Exhibit  10.5 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.22    Guaranty dated September 1, 1997 of Spurlock Industries,  Inc.
                  in favor of D.B. Western,  Inc.,  incorporated by reference to
                  Exhibit  10.6 to the  Registrant's  Form 10-Q for the  quarter
                  ended  September  30,  1997,  filed  with the  Securities  and
                  Exchange Commission on November 14, 1997.

         10.23    Guaranty  of Payment  dated  September  30,  1997 of Irvine R.
                  Spurlock for the benefit of D.B. Western,  Inc.,  incorporated
                  by reference to Exhibit 10.7 to the Registrant's Form 10-Q for
                  the  quarter  ended   September  30,  1997,   filed  with  the
                  Securities and Exchange Commission on November 14, 1997.

         10.24    Indenture  dated August 13, 1997  between Town of Moreau,  New
                  York as grantor  and  Spurlock  Adhesives,  Inc.  as  grantee,
                  incorporated by reference to Exhibit 10.8 to the  Registrant's
                  Form 10-Q for the quarter ended September 30, 1997, filed with
                  the Securities and Exchange Commission on November 14, 1997.

         10.25    Indenture  dated August 13, 1997  between Town of Moreau,  New
                  York,  as grantor  and  Spurlock  Adhesives,  Inc. as grantee,
                  incorporated by reference to Exhibit 10.9 to the  Registrant's
                  Form 10-Q for the quarter ended September 30, 1997, filed with
                  the Securities and Exchange Commission on November 14, 1997.

         10.26    Employment Agreement by and between Spurlock Industries, Inc.,
                  Spurlock Adhesives  Incorporated [sic] and Phillip S. Sumpter,
                  dated as of March  11,  1996,  incorporated  by  reference  to
                  Exhibit 10.17 to Amendment No. 4 to the Registrant's Form 10-K
                  for  the  year  ended  December  31,  1996,   filed  with  the
                  Securities and Exchange Commission on April 16, 1998.

         10.27*   Employment Agreement by and between Spurlock Industries, Inc.,
                  Spurlock Adhesives,  Inc. and Phillip S. Sumpter,  dated as of
                  April 1, 1998.

         10.28*   Deed, dated October 9, 1997, between Spurlock Adhesives, Inc.,
                  as Grantor, and the County of Saratoga Industrial  Development
                  Agency, as Grantee.

         10.29*   Bill of Sale, dated October 1, 1997, from Spurlock  Adhesives,
                  Inc., to the County of Saratoga Industrial Development Agency.

         10.30*   Trust Indenture,  dated October 1, 1997, between the County of
                  Saratoga Industrial Development Agency and Star Bank, N.A.

         10.31*   Installment Sale Agreement, dated October 1, 1997, between the
                  County of Saratoga Industrial  Development Agency and Spurlock
                  Adhesives, Inc.

         10.32*   Irrevocable  Transferable  Direct Pay Letter of Credit No. NSL
                  792132,   dated  October  10,  1997,  from  KeyBank   National
                  Association in favor of Star Bank, N.A.

         10.33*   Letter of Credit  Reimbursement  Agreement,  dated  October 1,
                  1997,  between Spurlock  Adhesives,  Inc. and KeyBank National
                  Association.

         10.34*   Pledge and Assignment,  dated October 1, 1997, from the County
                  of Saratoga Industrial Development Agency to Star Bank, N.A.

         10.35*   Mortgage and Security  Agreement,  dated October 1, 1997, from
                  the  County of  Saratoga  Industrial  Development  Agency  and
                  Spurlock Adhesives, Inc. to KeyBank National Association.

         10.36*   Security  Agreement,  dated October 1, 1997,  between Spurlock
                  Adhesives,  Inc., as Debtor, and KeyBank National Association,
                  as Secured Party.

         10.37*   Guaranty of Payment and  Performance,  dated  October 1, 1997,
                  from   Spurlock   Industries,   Inc.,   to  KeyBank   National
                  Association.

         10.38*   Remarketing  Agreement,  dated October 1, 1997, among Spurlock
                  Adhesives,  Inc., KeyBank National  Association and the County
                  of Saratoga Industrial Development Agency.

         10.39*   Pledge and Security Agreement,  dated October 1, 1997, between
                  Spurlock Adhesives, Inc. and KeyBank National Association.

         10.40*   Payment  in Lieu of Tax  Agreement,  dated  October  1,  1997,
                  between the County of Saratoga  Industrial  Development Agency
                  and Spurlock Adhesives, Inc.

         10.41*   Building Loan Agreement,  dated October 1, 1997, among KeyBank
                  National Association,  Spurlock Adhesives, Inc. and the County
                  of Saratoga Industrial Development Agency.

         10.42*   Tax  Regulatory  Agreement,   dated  October  10,  1997,  from
                  Spurlock  Adhesives,  Inc.,  for the  benefit of the County of
                  Saratoga Industrial Development Agency and Star Bank, N.A.

         10.43*   Deed of Trust and Security  Agreement,  dated October 1, 1997,
                  from Spurlock  Adhesives,  Inc. to Otto W. Konrad and Bruce H.
                  Matson,  as  collective  Trustee,  for the  benefit of KeyBank
                  National Association.

         10.44*   Hazardous  Substances  Indemnity  Agreement,  dated October 1,
                  1997, by Spurlock  Adhesives,  Inc., and Spurlock  Industries,
                  Inc., for the benefit of KeyBank National Association.

         10.45*   Guaranty,  dated October 1, 1997,  from  Spurlock  Industries,
                  Inc., to the County of Saratoga Industrial Development Agency.

         10.46*   Performance Bond No. 644927,  dated October 9, 1997, issued by
                  Nobel Insurance Company, as Surety, on behalf of D.B. Western,
                  Inc.,  as  Principal,  for the benefit of Spurlock  Adhesives,
                  Inc., Key Bank and National Bank of Canada, as the Obligees.

         10.47*   Promissory   Note,  dated  October  10,  1997,  from  Spurlock
                  Adhesives, Inc., payable to KeyBank National Association.

         10.48*   Settlement  Agreement,  dated  April 8, 1998,  among  Spurlock
                  Industries,  Inc., Spurlock  Adhesives,  Inc., Spurlock Family
                  Limited  Partnership,  H. Norman  Spurlock,  Jr. and Harold N.
                  Spurlock, Sr.

         10.49*   Unconditional  Guaranty,  dated April 8, 1998, given by Harold
                  N. Spurlock, Sr., to Spurlock Adhesives, Inc.

         10.50*   Pledge and Security  Agreement,  dated April 8, 1998,  between
                  Spurlock   Adhesives,   Inc.,  and  Spurlock   Family  Limited
                  Partnership.

         10.51*   Promissory  Note,  dated April 8, 1998,  from Spurlock  Family
                  Limited Partnership, payable to Spurlock Adhesives, Inc.

         21*      Subsidiaries of the Registrant.

         23.1*    Consent of Cherry, Bekaert & Holland, L.L.P.

         23.2*    Consent of James E.  Scheifley &  Associates,  P.C.  (formerly
                  Winter, Scheifley & Associates, P.C.), independent auditors

         27*      Financial Data Schedule (filed electronically only).


*  Filed herewith.