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

                                    FORM 10-K

                                 Amendment No. 4
                                       to
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1996

                                       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  

<PAGE>

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 12, 1997, was $1,564,462.13.

         The number of shares  outstanding of Common Stock as of March 31, 1997,
was 6,573,639.

Documents Incorporated by Reference:

         The Company's Proxy definitive Statement for its 1997 Annual Meeting of
Shareholders  (to be filed) is  incorporated  by reference into Part III of this
Form 10-K.


                                      -2-
<PAGE>

                                    AMENDMENT

         The  Registrant's  Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 is hereby amended as follows:

                              Reasons for Amendment

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,  Inc.  ("Spurlock
Adhesives"),  the Company's sole operating subsidiary,  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. As a result of these events, which are more particularly described
below, the Company's financial statements for the fiscal year ended December 31,
1996, as presented herein below, have been restated.  The restatement  primarily
involved  reclassification  of  expenses,  with  limited  impact  on  previously
reported earnings.  See Note 2 of the Notes to Consolidated Financial Statements
in  Item 8  below,  and  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations" in Item 7.

Shareholders' Derivative Suit

         On April 28, 1997, seven shareholders of Spurlock Industries, Inc. (the
"Company" or the "Registrant") 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.


                                      -3-
<PAGE>

         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  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.


                                      -4-
<PAGE>

         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.

         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


                                      -5-
<PAGE>

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 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


                                      -6-
<PAGE>

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 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


                                      -7-
<PAGE>

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 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.

Restatement of Financial Statements

         As indicated above,  certain of the Company's  accounting records,  and
the records of its predecessor companies, had been falsified commencing as early
as 1992.  Accordingly,  the Company's  financial  statements for the fiscal year
ended December 31, 1996, as presented herein,  have been restated to reflect the
correction of these  fraudulent  acts. The  restatement  primarily  involves the
reclassification  of  expenses,  with  limited  impact  on  previously  reported
earnings. As disclosed in the restatement, net


                                      -8-
<PAGE>

income was  previously  reported to be $1,467,019,  or $0.22 per share,  for the
year ended December 31, 1996, and is now restated to be $1,493,675, or $0.22 per
share,  for the  year  ended  December  31,  1996.  For  additional  information
regarding the fraudulent accounting entries,  reference is made to Note 2 of the
Notes to  Consolidated  Financial  Statements in Item 8 below and  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  in
Item 7.

                                     PART II

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, 1996,  is derived from the  consolidated  financial  statements  of Spurlock
Industries.  The financial statements as of December 31, 1996, as restated,  and
for the five  years  ended  December  31,  1996,  have been  audited  by Winter,
Schiefley & Associates, P.C., independent auditors.
<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                           -------------------------------------------------------------------------
                                                               1996         1995 (2)           1994            1993         1992(1)
                                                               ----         --------           ----            ----         -------
Income Statement Data:

<S>                                                       <C>             <C>            <C>              <C>             <C>       
Net Sales............................................     $28,643,415     $33,243,677    $ 30,512,704     $23,475,249     $9,032,153
Cost of sales........................................      21,129,265      26,092,053      26,269,016      20,268,532      8,031,692

Gross profit.........................................       7,514,150       7,151,624       4,243,688       3,206,717      1,000,461
Selling, general and administrative expenses.........       4,414,422       3,903,371       3,456,356       3,808,775      1,725,337
                                                            ---------       ---------       ---------       ---------      ---------
Income (Loss) from operations........................       3,099,728       3,248,253         787,332       (602,058)      (724,876)

Other income and expenses
Interest income......................................          83,376          12,007           2,513          12,849          3,649
Interest expense.....................................       (667,942)       (663,662)       (828,261)       (668,670)      (127,978)
                                                            ---------       ---------       ---------       ---------      ---------
Income (Loss) from continuing operations.............       2,515,162       2,596,598        (38,416)     (1,685,387)    (1,061,205)
Provision for income taxes...........................       1,021,487         115,600               -               -              -
                                                            ---------      ----------       ---------       ---------      ---------
Net Income (Loss)....................................       1,493,675       2,480,998        (38,416)     (1,685,387)    (1,061,205)
                                                            =========      ==========         =======     ===========    ===========
Net Income (Loss) per common share:
   From continuing operations........................           $0.22           $0.37         ($0.01)         ($0.42)        ($0.30)
                                                                -----      ----------        --------     -----------    -----------
</TABLE>


                                       -9-
<PAGE>

<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                       -----------------------------------------------------------------------------
                                                              1996             1995           1994            1993          1992(1)
                                                              ----             ----           ----            ----          -------
Balance Sheet Data:
<S>                                                        <C>             <C>             <C>             <C>            <C>       
Current assets.......................................      $2,288,914      $3,099,414      $3,715,917      $1,748,663     $1,857,682
Current liabilities..................................       4,388,860       5,330,308       8,133,204       5,978,068      5,070,012
Total assets.........................................      12,270,407       9,342,968       9,996,870       8,305,184      8,190,056
Long-term debt.......................................       3,402,621         983,652       1,354,556       1,779,592        427,433
Stockholders' equity(3)..............................       4,292,783       2,919,108         509,110         547,524      2,082,911

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

Weighted average number of common shares
   outstanding.......................................
                                                            6,711,733       6,717,667       4,266,066       3,999,566      3,519,369
Cash dividends declared .............................               0               0               0               0              0
Book value per share (4).............................           $0.64           $0.43           $0.08           $0.08          $0.34
</TABLE>

(1)  The 1992 increases in sales,  assets and equity reflect the  acquisition of
     Spurlock Adhesives on August 5, 1992.
(2)  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.
(3)  For the four 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.
(4)  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 years ending December 31,
     1996 were: 6,711,733, 6,717,667, 6,626,066, 6,399,566 and 4,519,369.


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 Spurlock Industries' 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.

Accounting Irregularities and Restatement of Financial Statements

         As described in "Reasons for Amendment" at the beginning of this Report
and Note 2 of the Notes to Consolidated  Financial Statements,  in January 1998,
the Company discovered that financial  information  regarding payments on a note
receivable from H. Norman  Spurlock,  Jr., an executive  officer and director of
the  Company,  and the  payment  of travel and  related  expenses  of H.  Norman
Spurlock,  Jr. had been falsified to intentionally mislead management concerning
their propriety.  Subsequent to this discovery,  another  executive  officer and
director,  Irvine R. Spurlock,  admitted to the payment of personal  expenses by
the Company  recorded as equipment and to personal use of the  Company's  credit
card. As reported in the SLC  Supplement,  an independent  investigation  by the
Special  Litigation  Committee  confirmed  that  certain  of the above  acts had
transpired  through the collusion of another  officer of the Company,  Warren E.
Beam.  Accounting records of the Company,  and its predecessor  companies,  were
falsified  commencing  as  early  as  1992.  Since  learning  of the  fraudulent
accounting entries,  the Company has taken actions to achieve restitution of the
diverted funds and to prevent a recurrence of these situations.

         The Company's  financial  statements for the fiscal year ended December
31,  1996 have  been  restated  to  reflect  the  correction  of the  fraudulent
accounting  entries.  Prior to 1996,  the  fraudulent


                                      -10-
<PAGE>

accounting entries were confined to reclassification  within Selling and General
Administrative  Expenses.  As a result,  there was no material effect on the net
income of the  Company  for those  years.  The  personal  expenses  recorded  as
equipment were  reclassified  as a Note Receivable - Officer  effective  January
1996.  This  treatment  resulted from the  restitution  made by Irvine  Spurlock
immediately upon disclosure.  Income aggregating  $11,172 resulting from accrued
interest  receivable  on the Note  Receivable  -  Officer  and the  reversal  of
depreciation  expense for the personal expenses recorded originally as equipment
was not deemed  material.  After  restatement,  the  pretax  effect of the total
misappropriation  of assets amounted to $26,656 in additional  income  resulting
from accrued interest receivable on the Note Receivable-Officer and the reversal
of  depreciation  expense  for the  personal  expenses  recorded  originally  as
equipment.

         The  information  in the  discussion  that follows is  presented  after
restatement of the financial statements.

General

         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.

         Overview.  The  Company's  operating  results  have  shown  substantial
improvement  in the fiscal years ended  December 31,  1996,  1995 and 1994.  The
Company achieved nearly break-even  results in 1994,  reported record profits of
$2,480,998  in 1995 and  reported  profits  of  $1,493,675  in 1996.  Management
attributes  this  improvement  to the  refocusing  of the  Company  on its  core
resin/adhesives  business and the termination of  non-profitable  gas generation
operations,  the  implementation  of a cost  reduction  program  in early  1994,
increased  control over raw materials prices and improved  product margins.  The
lower net profit in 1996 is due mainly to the  effect of income  taxes,  as loss
carryforwards were substantially utilized in 1995.

         Discontinued  Operations.  In the first  quarter of 1994,  the Board of
Directors  of the Company  decided to  discontinue  its  Colorado  gas  recovery
engineering and consulting business and to close its Denver office. Such actions
were  completed  by the end of the  year.  Operating  results  for 1995 and 1996
reflect only those of the Company's primary subsidiary, Spurlock Adhesives.

         Dependence on Construction and Related Industries.  Demand for Spurlock
Industries' products and the Company's financial performance are closely tied to
the fortunes of the construction,  forest products and related  industries.  See
"Item 1. Business - Seasonality and Backlog." Accordingly,  the recent period of
relatively low interest rates (including  mortgage loan rates) and the stability
of the housing, construction and related industries, have favorably impacted the
Company's recent financial performance.

         Gross  Margins and Commodity  Prices.  Raw  materials  costs  comprised
approximately  57%,  62%  and  68%  of  net  sales  in  1996,  1995,  and  1994,
respectively.  Raw materials  are by far the largest  component of cost of goods
sold.  Therefore,  the  Company's  operating  performance  is sensitive to price


                                      -11-
<PAGE>

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. During the first part of 1996,
the Company was able to pass on increases  or decreases in raw material  prices,
which was the primary  reason for the improved  margins in fiscal 1996.  Margins
were squeezed during the last quarter of that year due to competition and excess
capacity  in  certain  markets.  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 1996, 1995, and 1994,  freight costs
relating to delivery of the Company's  products  comprised  approximately  3.9%,
4.2%, and 4.5%, respectively, of net sales. Accordingly, the Company's operating
performance  is  sensitive  to  movements  in  freight  costs.  In a  June  1994
cost-reduction  move, the Company  discontinued the majority of its own trucking
operations and began  contracting with third parties for most of these services.
As a result,  combined savings of  approximately  $117,000 or 0.4% of sales were
achieved  in the  salary  and  wages  component  of cost of  goods  sold  and in
insurance  expenses  in  1995.  The  further  decrease  of  $276,028  in 1996 is
attributable to changes in customer processes that decreased shipments,  as well
as one customer changing terms to freight collect.

         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 $3,500,000 line of
credit  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 the formerly leased formaldehyde plant,
which term loan is secured by all assets.

         Purchase of Waverly  Formaldehyde Plant. On December 19, 1991, Spurlock
Adhesives  entered into a Formaldehyde  Plant Lease with D. B. Western,  Inc. of
Northbend,  Oregon,  whereby D. B.  Western,  Inc.  agreed to  construct a fully
operational  formaldehyde  plant at Waverly,  Virginia and lease the facility to
Spurlock  Adhesives for ten (10) years at $55,000 per month,  commencing at such
time as the plant became mechanically  complete and ready for startup. The lease
commenced in February,  1993.  Because of a dispute  relating to the operational
performance  of the plant,  during the fourth quarter of 1993, the Company begin
deferring  certain payments on the plant lease. The amounts deferred through the
fiscal  years  ended  December  31,  1995 and 1994 were  $510,070  and  $480,000
respectively.  Beginning in August 1994, the Company paid for plant usage at the
rate of $15,000 per week, or approximately  $5,000 per month more than the lease
rate as part of an informal accommodation of such dispute.

         In July 1996, the Company  consummated an agreement with D. B. Western,
Inc. whereby the Company  purchased the plant,  terminated the lease and settled
all claims with respect to the facility for $3,675,000.

         Compliance with Environmental Regulations.  Environmental costs charged
to  operations  aggregated  $202,076,  $277,349 and $261,932 for the years ended
December 31, 1996,  1995 and 1994,  respectively.  As a percentage of net sales,
such  expenditures  totaled .71%,  .83% and .86%,  respectively  over such three
years. In all three 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,


                                      -12-
<PAGE>

recurring costs of doing business in its industry.  No capital  expenditures for
environmental  control  facilities are  anticipated for 1997 other than $860,000
for  remediation  in  connection  with its planned  acquisition  of property and
industrial facilities near Albany, NY, as described under "Liquidity and Capital
Resources" below.

         Capacity Utilization. In 1996, the Waverly, Virginia formaldehyde plant
ran at  approximately  83% of capacity as compared to 85% in 1995.  The decrease
was due to  lower  volumes  of  resin  being  produced.  The  Malvern,  Arkansas
formaldehyde  plant ran at approximately 84% in 1996 as compared to 90% in 1995.
The decrease  was due to excess  capacity in that market  area.  In 1996,  resin
capacity  utilization  at the Waverly  facility was 55% compared to 60% in 1995.
This change was due to a customer's order patterns and process changes to better
utilize  the  products.  The  Malvern  facility  maintained  its resin  capacity
utilization  at 65% for 1996 and 1995.  In the  future,  management  intends  to
continue  to adjust the  Company's  production  and  product  mix to meet market
conditions in order to maximize profits.

         In the fourth quarter of 1996,  the Company  entered a contract of sale
with Niagara  Mohawk Power Company for the purchase of certain real property and
facilities near Albany,  New York, to construct  thereon  certain  manufacturing
facilities for the production of  formaldehyde  and resins.  The total estimated
cost of such proposed New York facility would approximate $8,300,000,  including
environmental   remediation   costs  estimated  by  an  outside   consultant  at
approximately  $860,000.  Management  believes  that  financing for the project,
adequate in amount and on reasonable terms, can be obtained by the Company,  via
a conventional loan or funding from industrial revenue bonds.

         The  Company  is unable  to  predict  at this  time,  when and if,  the
necessary  permits  for  the New  York  project  can be  obtained.  It has,  and
continues to, examine alternative sites for the proposed project.

         Conversion of Convertible Preferred Stock. In January, 1996, the holder
of  1,200,000  convertible  preferred  shares,  Harold  N.  Spurlock,  Chairman,
President and Chief  Executive  Officer of the Company,  converted  these shares
pursuant to their terms into 2,400,000 shares of the Company's common stock. For
the fiscal years ended December 31, 1995 and 1994,  the Company had  outstanding
1,200,000  shares of  convertible  preferred  stock,  $2.00 par value per share,
aggregating  $2,400,000.  In "Results of Operations"  below,  earnings per share
ratios assume the  conversion of all such  preferred  shares except in 1994 when
the effect was anti-dilutive.

         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, 1996.

Results of Operations

         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.


                                      -13-
<PAGE>

         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  62.36%  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  or $.22 per share of common stock
(on a fully diluted basis) declined from $2,480,998 or $.37 per share in 1995.

         Fiscal 1995 Compared to 1994. For the year ended December 31, 1995, the
Company reported net sales of $33,243,677,  an increase of 8.95% compared to net
sales of $30,512,704 for 1994. All sales related to sales of resin, formaldehyde
and  fertilizer  materials by the  Company's  wholly owed  subsidiary,  Spurlock
Adhesives.  Shipments of resin/adhesive  products - which comprised 68.3% of all
shipments in 1995 - declined  18.1% from 1994.  This drop in volume - due to the
concerted  effort by  management  to adjust the  product  sales mix to take full
advantage  of superior  margins  realizable  in the  formaldehyde  markets - was
effectively  offset by a 74.8% increase in formaldehyde  shipments owing largely
to sales to a new customer  procured in 1994.  Overall product shipments dropped
approximately  3.3% from 1994.  Accordingly,  the increase in net sales for 1995
resulted from increased  average selling prices for the entire year for Spurlock
Industries' products.

         Cost of goods sold totaled $26,092,053 or 78.49% of net sales, compared
to  $26,269,016  or 86.09% of net sales for 1994. The decrease in costs of goods
sold as a percentage of net sales resulted from the Company's success in holding
both raw  material  costs and other  costs of goods sold  (such as  freight  and
energy  costs) to 1994 levels while  simultaneously  increasing  net sales.  The
Company's  gross  profit  and gross  margin  improved  substantially  in 1995 to
$7,151,624 and 21.51%,  respectively,  from $4,243,688 and 13.91%, respectively,
in 1994. The improved gross margin was primarily the result of improved mark-ups
in selling  prices,  due in large part to the  success of the Company in passing
raw material costs along to its customers.


                                      -14-
<PAGE>

         Selling,  general and administrative  expenses for 1995 were $3,903,371
or 11.74% of net sales,  compared to  $3,456,356  or 11.33% of net sales for the
same period in 1994. The increase in operating  expenses resulted primarily from
an increase of $536,568 or 35.1% in human  resources  expense,  owing largely to
increases in salaries for key executive  and middle  management  personnel.  The
salaries of such  personnel  had been frozen for the previous  three years.  (In
late January and early February 1998,  however,  the Company discovered that two
of its officers and directors had diverted  corporate funds for personal use and
that,  according  to the  Special  Litigation  Committee,  a third  officer  had
colluded in certain of such diversions.  For further information with respect to
these defalcations, see "Reasons for Amendment" above.)

         Interest expense in 1995 totaled $663,662 or 2.00% of net sales, versus
$828,261 or 2.71% of net sales in 1994.  The  decrease was due to a reduction in
average outstandings of interest accruing debt of approximately $250,000 or 6.8%
from the prior  year,  and  reduced  borrowing  costs  attributable  to the more
attractive  rates offered under the previous  working capital  facility  entered
into in February 1995.

         The provisions for income taxes totaled  $115,600 for 1995,  consisting
of $104,000 in state income tax and $11,600 in federal income tax, the latter of
which largely  resulted from to the  utilization of loss  carry-forwards  in the
amount of  $801,532.  Due to a net loss,  no federal or state  income taxes were
accrued for 1994. Net earnings after taxes for 1995 increased  dramatically over
the prior  year,  totaling  $2,480,998  or $.37 per share of common  stock (on a
fully  diluted  basis)  compared to a loss of  ($38,416)  or ($.01) per share in
1994.

Liquidity and Capital Resources

         General.  In fiscal 1996,  1995 and 1994, the Company 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.  Although  the Company  continued to rely on these
funds  sources in 1996 and 1995,  strong  earnings  and cash flow  allowed it to
substantially  reduce its  dependence on accounts  payable and to strengthen its
working capital and cash positions.

         Fiscal 1996 Compared to 1995. 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.

         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. On December 31, 1996, outstanding loans under the facility totaled
$1,420,801, which was the total amount available at such time based on levels of
accounts  receivable  and inventory on which  borrowing  availability  is based.
Borrowings during the entire fiscal year averaged approximately $1,450,000.  The
new 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 cash generated from  operations,  together with amounts  available
under the Company's  revolving credit  facility,  will be sufficient to meet the
Company's anticipated working capital and liquidity requirements during 1997 and
1998.


                                      -15-
<PAGE>

         In addition to borrowings  under its  revolving  credit  facility,  the
Company had  outstanding  at year end 1996 debt totaling  $4,431,711,  including
current  maturities of $1,029,090.  Such debt extends through 2004, with current
maturities thereof dropping to $996,087 in 1998 and significantly thereafter. In
1995, debt totaled $1,977,242 with current maturities of $993,590.  The increase
in total debt is  attributable  to the new  borrowings  to purchase the formerly
leased  formaldehyde plant. The new long term facility described above initially
totaled $3,639,000, with $3,436,832 outstanding at year end.

         The 1996 net earnings  strengthened the Company's capital position,  as
its retained  earnings deficit was reduced by $1,493,675 from year end 1995, and
total equity  increased  47.1% to $4,292,783  from  $2,919,108 at year end 1995.
Because the equity  increase  outpaced  the increase in total  liabilities,  the
ratio of total  liabilities to total net worth, a measure of leverage,  improved
to 1.87 at year end 1996 from 2.2 at year end 1995.

         As described in "General - New York  Facility"  above,  the Company has
plans to construct  manufacturing  facilities for the production of formaldehyde
and  resins  in the  State of New  York.  The  estimated  cost of such  proposed
facility would approximate $8,300,000, including environmental remediation costs
estimated  by  an  outside  consultant  at  approximately  $860,000.  Management
believes that  financing  for the project,  adequate in amount and on reasonable
terms,  can be obtained by the Company via a  conventional  loan or funding from
industrial revenue bonds.

         The  Company  is unable  to  predict  at this  time,  when and if,  the
necessary  permits  for  the New  York  project  can be  obtained.  It has,  and
continues to, examine alternative sites for the proposed project.

         Fiscal 1995  Compared to 1994. In 1995,  the Company  reported a strong
cash flow from net income and depreciation  and  amortization of $3,181,238,  an
improvement  of  $2,659,055  or 509% over the  $522,183  reported in 1994.  This
strong cash flow,  supplemented  by significant  reductions in  receivables  and
inventory  of $546,277  and  $566,152,  respectively,  permitted  the Company to
reduce  accounts  payable by $3,063,008,  fund fixed asset additions of $425,769
and reduce notes and loans by $1,012,309.  Working capital increased  $2,186,393
or approximately  49% to ($2,230,894)  from ($4,417,287) in 1994, as the Company
drastically  reduced its level of payables,  cut payment time to trade creditors
by  approximately  half and began paying within  standard thirty (30) day terms.
Despite an  increase  in cash and trading  securities  of $373,767 to  $450,751,
current  assets  actually fell by 16.6%.  This drop was due in large part to the
lofty levels of product sales prices and accordingly  trading assets at December
31,  1994.  In  addition,  the  Company  was able to quicken  collection  of its
accounts receivable.

         In February 1995 the Company entered into a $3,500,000 revolving credit
facility with a new lender.  On December 31, 1995,  outstanding  loans under the
facility, which has now been replaced,  totaled $1,329,096,  leaving $109,000 in
unused loan availability at such time based on levels of accounts receivable and
inventory on which borrowing availability is based. Borrowings during the entire
fiscal year averaged approximately $1,600,000.

         The 1995 revolving credit facility  contained 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.  During
1995,  technical  violations of certain such covenants  resulted,  for which the
Company received a waiver from the lender.

         In addition to borrowings under its 1995 revolving credit facility, the
Company had outstanding at year end 1995 "notes payable-other" of $82,447 due in
1996,  which  represented  the  remaining


                                      -16-
<PAGE>

obligations  under  various  private  placement  notes to  investors.  Principal
payments  of  $423,218  were made on such notes in 1995.  The  Company  also had
$1,977,242 in long term debt at year end 1995,  including current  maturities of
$993,590.  Approximately half of total long term debt consisted of notes payable
to two former vendors and suppliers.

         Deferred rent increased to $510,070 from $480,000 at year end 1994, and
related to the lease for a formaldehyde plant located in Waverly,  Virginia from
D.B. Western,  which lease was then in dispute. Such dispute was settled and the
plant was  purchased  by the  Company in July 1996.  See  "General - Purchase of
Waverly  Formaldehyde  Plant"  above.  Lease  payments of $15,000 a week - which
approximated  $5,000 per month more than the required  monthly rental of $55,000
-would have served to repay most of such deferred rent by the  expiration of the
lease in February 2003. Such  additional  rental payments paid during 1995 would
have actually  reduced deferred rent from the 1994 level to $360,000 but for the
addition to deferred  rent of  $120,000  relating to an account  payable to D.B.
Western, Inc. for catalyst relating to the operation of the leased facility.

         The  strong  1995  net  earnings  strengthened  the  Company's  capital
position,  as its retained  earnings deficit was reduced by $2,480,998 from year
end 1994, and total equity  increased  473% to $2,919,108  from $509,110 at year
end 1994.  Because  of the  equity  increase  and  substantially  reduced  total
liabilities,  the ratio of total  liabilities  to total net worth,  a measure of
leverage, decreased significantly to 2.2 from 18.6 at year end 1994.

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.



                                      -17-
<PAGE>

Item 8.        Financial Statements and Supplementary Data

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Spurlock Industries, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  Spurlock
Industries,  Inc. (formerly Air Resources  Corporation) as of December 31, 1996,
and 1995, and the related consolidated  statements of operations,  stockholders'
equity,  and cash flows for each of the three 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.
(formerly Air Resources  Corporation) as of December 31, 1996, and 1995, and the
results of its operations, and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.


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


Englewood, Colorado
January 17, 1997


March 13, 1998
with respect to Note 2


                                      -18-
<PAGE>


                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                           Consolidated Balance Sheets
                        As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets
                                                              1996                       1995
<S>                                                     <C>                          <C>         
Current Assets:
Cash and cash equivalents                               $     106,072                $    250,751
Trading securities                                                  -                     200,000
Accounts receivable - trade                                 1,446,930                   1,813,775
Other accounts receivable                                       8,718                      62,179
Accounts and notes receivable
   -   officers current portion                                38,595                      40,520
Inventories                                                   541,632                     595,765
Prepaid income taxes                                           72,477                           -
Deferred tax asset                                                  -                      98,300
Prepaid expenses                                               74,490                      38,124
                                                        -------------                ------------
Total current assets                                        2,288,914                   3,099,414

Property, plant and equipment, net of
accumulated depreciation of $4,305,767 and
$3,559,436                                                  9,378,290                   5,639,810

Other Assets:
Accounts and notes receivable
         -  officers                                          193,467                     191,194
Investments                                                   150,000                     150,000
Other                                                         259,736                     262,550
                                                        -------------                ------------
                                                              603,203                     603,744
                                                        -------------                ------------
Total assets                                            $  12,270,407                $  9,342,968
                                                        =============                ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.




                                      -19-
<PAGE>


                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                           Consolidated Balance Sheets
                        As of December 31, 1996 and 1995
                                   (Continued)
<TABLE>
<CAPTION>

Liabilities and Stockholders' Equity
                                                        1996                       1995
<S>                                                 <C>                         <C>     
Current Liabilities:
Notes payable - line of credit                        $ 1,420,801               $ 1,329,096
Notes payable - other                                         -                      82,447
Current portion of long-term debt                       1,029,090                   993,590
Accounts payable - trade                                1,678,442                 2,069,561
Accrued expenses                                          260,527                   249,922
Amounts due stockholders and
 and related parties                                            -                    95,622
Deferred rent                                                   -                   510,070
                                                   --------------            --------------
Total current liabilities                               4,388,860                 5,330,308

Long-term debt                                          3,402,621                   983,652
Deferred tax liability                                    143,476                   109,900
Post retirement benefit liability                          42,667                         -
                                                   --------------            --------------

Commitments and contingencies                           7,977,624                 6,423,860

Stockholders' Equity:
Preferred stock, convertible,
  $2 par value, 5,000,000 shares
  authorized, 1,200,000 shares
  issued and outstanding                                        -                 2,400,000
Common stock, no par value
  500,000,000 shares authorized
  6,573,639, and 4,325,066
  shares issued and outstanding                         4,808,814                 2,528,814
Accumulated deficit                                     (516,031)               (2,009,706)
                                                   --------------            --------------
                                                        4,292,783                 2,919,108
                                                   --------------            --------------
Total liabilities and
  stockholders' equity                             $   12,270,407            $    9,342,968
                                                   ==============            ==============
</TABLE>


                                      -20-
<PAGE>


                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                      Consolidated Statements of Operations
              For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                           1996                  1995                 1994
<S>                                                      <C>                  <C>                  <C>
Revenues:
Net sales                                                $28,643,415          $33,243,677          $30,512,704
Cost of sales                                             21,129,265           26,092,053           26,269,016
                                                         -----------          -----------          -----------
                                                           7,514,150            7,151,624            4,243,688
Selling, general and
  administrative expenses                                  4,414,422            3,903,371            3,456,356
                                                         -----------          -----------          -----------
                                                           3,099,728            3,248,253              787,332
Other income and (expense):
Other income                                                  83,376               12,007                2,513
Interest expense                                           (667,942)            (663,662)            (828,261)
                                                         -----------          -----------          -----------
                                                           (584,566)            (651,655)            (825,748)

Net income before income taxes                             2,515,162            2,596,598             (38,416)
Provision for income taxes                                 1,021,487              115,600                    -
                                                         -----------          -----------          -----------
Net income (loss)                                        $ 1,493,675           $2,480,998          $  (38,416)
                                                         ===========          ===========          ===========

Earnings per share                                             $0.22                $0.37              $(0.01)
                                                         ===========          ===========          ===========

Weighted average shares outstanding                        6,711,733            6,717,666            4,226,066
                                                         ===========          ===========          ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.



                                      -21-
<PAGE>


                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                      Consolidated Statements of Cash Flows
              For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                                    1996               1995              1994
<S>                                                             <C>                <C>                <C>
Operating activities:
Net income (loss)                                               $ 1,493,675        $ 2,480,998        $  (38,416)
Adjustments to reconcile net income
  (loss) to net cash:
Depreciation and amortization                                       751,057            700,240            560,599
Issuance of common stock for services                                     -              5,000                  -
Write off of intangible assets                                            -                  -             23,372
Abandonment of fixed assets                                               -                  -              9,958
(Increase) decrease in receivables                                  420,306            473,202          (371,281)
(Increase) decrease in trading securities                           200,000          (200,000)                  -
(Increase) decrease in inventory                                     54,133            566,152          (320,578)
(Increase) decrease in prepaid expenses                           (108,843)              6,001              1,695
(Increase) in other assets                                            2,814           (79,381)           (15,181)
Increase in deferred taxes                                          131,946             11,600                  -
Increase (decrease) in accounts payable
  and accrued expenses                                            (380,584)        (2,187,581)            775,959
Increase in post retirement benefit liability                        42,667

                                                                -----------        -----------        -----------
Total adjustments                                                 1,113,496          (704,767)            664,543
                                                                -----------        -----------        -----------
Net cash provided by (used in)
 operating activities                                             2,607,171          1,848,306            626,127

Investing activities:
Purchase of fixed assets                                        (1,184,369)          (352,694)          (316,265)
Advances to officers                                               (30,348)          (136,733)                  -
Repayment of officer advances                                       30,000
                                                                -----------        -----------        -----------
Net cash provided by (used in)
 investing activities                                           (1,184,717)          (489,427)          (316,265)

Financing activities:
Acquisition of common shares                                      (120,000)            (1,000)                  -
Proceeds of new borrowings                                                -                  -             60,665
Repayment of related party loans                                   (95,622)           (99,728)                  -
Repayment of notes and loans                                    (1,351,511)        (1,012,309)          (318,261)
                                                                -----------        -----------        -----------
Net cash provided by (used in)
 financing activities                                           (1,567,133)        (1,113,037)          (257,596)

Net increase in cash and cash equivalents                         (144,679)            173,767             52,266
Beginning cash                                                      250,751             76,984             24,718
                                                                -----------        -----------        -----------
Ending cash                                                     $   106,072        $   250,751        $    76,984
                                                                ===========        ===========        ===========
</TABLE>


                                      -22-
<PAGE>

                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                      Consolidated Statements of Cash Flows
              For the Years Ended December 31, 1996, 1995 and 1994
                                   (Continued)
<TABLE>
<CAPTION>

                                                                       1996                1995               1994

<S>                                                               <C>                    <C>                 <C>
Supplemental cash flow information:
Cash paid for:  Interest                                          $   667,942            $605,825            $391,054
                Income taxes                                          658,577             104,000                   -

Non-cash financing and investing activities:
Acquisition of equipment with notes payable                         3,305,168              50,818                   -
Conversion of accounts payables to note                                                   839,500                   -

</TABLE>


The accompanying notes are an integral part of the financial statements.






                                      -23-
<PAGE>

                            Spurlock Industries, Inc.
                      (Formerly Air Resources Corporation)
                 Consolidated Statement of Stockholders' Equity
              For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                 Common Shares                    Preferred                      Accumulated
                                                    Amount         Shares          Amount           Deficit

<S>                              <C>              <C>             <C>            <C>             <C>         
Balance December 31, 1993           4,226,066     $ 2,599,814      1,200,000     $ 2,400,000     $(4,452,288)

Net loss for the year                      -               -              -                -         (38,416)
                                 ------------     -----------    -----------     -----------     ------------
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)
                                 ============    ============    ===========    ============     ============
</TABLE>

The accompanying notes are an integral part of the financial statements.




                                      -24-
<PAGE>


                            Spurlock Industries, Inc.
                      (formerly Air Resources Corporation)
                   Notes to Consolidated Financial Statements


Note 1. Summary of Significant Accounting Policies

A.      Organization and Operations

Spurlock  Industries,  Inc. (formerly Air Resources  Corporation) was originally
incorporated  on March 17,  1986 in  Colorado.  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.

B.      Principles of Consolidation

The Company engages in the development,  production, and distribution of resins,
liquid fertilizers and formaldehyde through its wholly owned subsidiary Spurlock
Adhesives,   Inc.  All   inter-company   transactions   have  been   eliminated.
Substantially  all  of  the  Company's  revenues  have  been  derived  from  the
operations of Spurlock Adhesives.

C.      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,

                                           1996                    1995

            Raw materials                 $397,511               $403,273
            Work in process                  9,493                  8,677
            Finished goods                 134,628                183,815
                                          --------               --------
                                          $541,632               $595,765
                                          ========               ========

D.      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.


                                      -25-
<PAGE>

Useful lives for property and equipment are as follows:

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

E.      Intangible Assets

The cost of intangible assets are amortized using the straight-line  method over
their estimated useful economic lives.  They are stated at cost less accumulated
amortization.  The Company  reviews for the impairment of long-lived  assets and
certain  identifiable  intangibles  whenever events or changes in  circumstances
indicate that the carrying amount of an asset may not be recoverable.  Under FAS
121, an impairment  loss would be recognized  when  estimated  future cash flows
expected to result  from the use of the asset and its  eventual  disposition  is
less than its carrying amount. No such impairment losses have been identified by
the  Company  for the  1996 and 1995  fiscal  years.  During  1994  $23,372,  of
intangibles considered to be non-recoverable were charged to operations.

F.      Revenue Recognition

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

G.      Cash

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

H.      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 $202,076,
$277,349 and $261,932 for the years ended December 31, 1996, 1995 and 1994.

I.      Advertising

Advertising expenses are charged to expense upon first showing.  Amounts charged
to expense were $28,101, $27,880 and $648 for the years ended December 31, 1996,
1995 and 1994, respectively.

J.      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.



                                      -26-
<PAGE>

K.      Earnings Per Share

Earnings per share for periods  presented has been  computed  using the weighted
average  number of  shares  of  common  stock  outstanding  during  the  periods
presented.  Common stock  equivalents,  as determined  using the treasury  stock
method,  are  excluded  from the  computation  during loss years as their effect
would be anti-dilutive.

L.      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 not maintain cash
deposits at financial  institutions  in excess of the $100,000  limit covered by
the Federal  Deposit  Insurance  Corporation.  The  Company  has  several  major
customers,  (see  Note 12) 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.  The Company does not
hold or issue  financial  instruments  for trading  purposes nor does it hold or
issue interest rate or leveraged derivative financial instruments

M.      Stock-based Compensation

The Company  adopted  Statement  of Financial  Accounting  Standard No. 123 (FAS
123), Accounting for Stock-Based Compensation beginning with the Company's first
quarter of 1996.  Upon  adoption of FAS 123,  the Company  continued  to measure
compensation expense for its stock-based  employee  compensation plans using the
intrinsic value method  prescribed by APB No. 25, Accounting for Stock Issued to
Employees,  and has provided in Note 11 pro forma  disclosures  of the effect on
net income and earnings per share as if the fair value-based  method  prescribed
by FAS 123 had been applied in measuring compensation expense.

N.      Recent Pronouncements

In 1996 Financial Accounting Standards No. 125 (FAS 125) Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities was issued.
FAS 125 is  effective  for  transfers  and  servicing  of  financial  assets and
extinguishments  of liabilities  occurring  after December 31, 1996. The Company
will  adopt  FAS 125 in  1997.  Adoption  of FAS 125 is not  expected  to have a
material effect on the Company's  consolidated  financial  position or operating
results.

Note 2. Misappropriation of Assets and Restatement of Financial Statements

In January,  1998, the Company discovered that financial  information  regarding
payments on a note  receivable  from an  executive  officer and  director 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 and director admitted
that expenses  recorded as equipment and other  expenses  charged on the Company
credit card were personal in nature. An independent investigation confirmed that
these acts were conducted through apparent collusion with another officer of the
Company.  Accounting records of the Company, and its predecessor companies, were
falsified  commencing as early as 1992. After restatement,  the pretax effect of
the overstatement of selling,


                                      -27-
<PAGE>

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. Since learning of the misappropriation, the Company has taken
actions intended to prevent a recurrence of this situation

The Company's fiscal 1996 financial statements have been restated to reflect the
correction of the  misappropriations.  The effect of the  restatement  of fiscal
1996 results of operations is as follows:
<TABLE>
<CAPTION>

                                                     For the year ended December 31, 1996

                                                         Previously
                                                          Reported           Restated
<S>                                                      <C>               <C>        
Net Sales                                                $28,643,415       $28,643,415
COGS                                                      21,129,265        21,129,265
Gross Profit                                               7,514,150         7,514,150
SG&A Expenses                                              4,429,906         4,414,422
Income from Operations                                     3,084,244         3,099,728
Other Income                                                  72,204            72,204
Other Expenses                                             (667,942)         (667,942)
Net Income before Tax Provision                            2,488,506         2,515,162
Tax Provision                                              1,021,487         1,021,487
Net Income                                                 1,467,019         1,493,675
Net Income Per Share                                            0.22              0.22
</TABLE>

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.

Note 3. Accounts Receivable

During  January,  1994 the Company  entered  into a factoring  agreement  with a
financial  institution  whereby  the factor  agreed to advance the Company up to
$1,200,000  with recourse by purchasing  accounts  receivable  less than 90 days
old. The  advanced  amount was computed on 80% of  acceptable  receivables.  The
Company  agreed  to pay the  factor  a  percentage  of the  face  amount  of the
receivable for the advances as follows:  2% for items collected  within 30 days;
4% for items collected  between 31 and 60 days; and 6% for items collected after
61 days. Factoring fees charged to expense pursuant to this arrangement for 1995
and 1994 amounted to $94,156 and $425,684, respectively.

During  February,  1995 the Company replaced its accounts  receivable  factoring
agreement with a line of credit.  The line of credit is secured by the Company's
accounts  receivable  and  inventory.  Under  the terms of the  credit  line the
Company may borrow up to 85% of accounts receivable up to 90 days old and 50% of
inventory up to a maximum of $3,500,000. The line of credit was replaced in July
1996 with a new line of credit (see Note 6).

Note 4. Investments

The Company's 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.



                                      -28-
<PAGE>

At December 31, 1995 the Company  held debt  securities  bearing  interest at 6%
with a fair value and cost basis of $200,000.  The Company had no sales proceeds
from trading  securities  during the year ended  December 31, 1995.

The  Company  purchased  additional  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 amounting to $(16,333).

Note 5. Property and Equipment.

Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                                               1996                        1995 
<S>                                                      <C>                       <C>    
Land                                                             $69,233                   $69,233
Buildings                                                        547,041                   543,601
Machinery and equipment                                       12,326,040                 8,242,573
Construction in progress                                         305,913                   107,133
Vehicles                                                         285,189                   132,437
Furniture and fixtures                                           150,640                   104,269
                                                         ---------------           ---------------
                                                              13,684,056                 9,199,246
Accumulated depreciation and  amortization                     4,305,767                 3,559,436
                                                         ---------------           ---------------
                                                             $ 9,358,289               $ 5,639,810
                                                         ===============           ===============
</TABLE>

Depreciation charged to operations was $751,057,  $700,240, and $560,599 for the
years ended December 31, 1996, 1995 and 1994, respectively.

Substantially all of the Company's fixed assets secure debt described in Note 8.

The  Company  owns vacant  land  adjacent  to its  Waverly VA facility  which is
suitable for plant expansion. The cost of the land $150,000 is included in other
investments in the accompanying balance sheet.

Note 6. Accounts and Notes Receivable - Officers

Accounts and notes  receivable  officers  consisted of the following at December
31,

                                                    1996               1995


Notes receivables, at various rates                $232,062            $231,714
Less: current portion                                38,595              40,520
                                                -----------         -----------
                                                   $193,467            $191,194
                                                ===========         ===========


                                      -29-
<PAGE>

Note 7. Notes Payable.

Notes  payable - line of credit at December 31, 1995  consisted  of  outstanding
indebtedness pursuant to an accounts receivable financing agreement as described
in Note 2. At December 31, 1995 the outstanding  balance was $1,329,096  bearing
interest at prime plus 2.5% (11% at December 31,  1995) per annum.  The line was
repaid in July 1996 pursuant to a new credit facility with a bank which includes
an accounts  receivable  and inventory  line of credit and  long-term  financing
secured by plant and equipment.  The new credit line is secured by the Company's
accounts receivable and inventory and contains certain financial covenants which
the Company is currently in compliance  with.  At December 31, 1996,  borrowings
outstanding amounted to $1,420,801 at a year end interest rate of 8.25%.

The year end  balance  is equal to the  maximum  amount  of  borrowing  based on
available accounts receivable and inventory.

Notes payable - other at December 31, 1995 consists of following:

Promissory notes, with interest at 12% per annum,  originally due in March, 1993
with a balance due of $82,447 at December 31, 1995, repaid in 1996.

Note 8. Long-term Debt

Long-term debt consists of the following at December 31,
<TABLE>
<CAPTION>

                                                                    1996                   1995
<S>                                                          <C>                     <C>
Note payable bank, payable in monthly
 installments of $8,621 plus interest
 at 10%, repaid in July 1996                                             -               $ 206,897

Note payable bank, payable in monthly
 installments of $8,924 with interest
 at 8%, repaid in June 1996                                              -                  77,362

Note payable to a bank payable $50,542
 monthly including interest at prime + .5%
 or LIBOR rate + 2.75% (8.25% at December 
 31, 1996) secured by plant and equipment
 due July, 2002                                                  3,436,832                 509,138

Note payable to a bank with interest at
 12% payable $1,832 monthly secured by
 real property due in August, 2004                                 109,295                 117,583

Note payable vendor, payable in monthly 
 installments of $23,320 with interest at
 Prime + 1.5% (10% at December 31,
 1995) due March, 1998                                             349,780                 629,620


                                      -30-
<PAGE>

Note payable supplier, payable in
 monthly installments of $12,861, with
 interest at 8%, repaid in June 1996                                     -                 379,831

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

Various notes payable, payable in monthly
 installments of $4,634 with interest
 from 8% to 10% due December 1997 to 
 November 1999 secured by personal property                        135,300                  56,811
                                                             -------------           -------------
                                                                 4,431,711               1,977,242
Less: current portion                                            1,029,090                 993,590
                                                             -------------           -------------
                                                             $   3,402,621                $983,652
                                                             =============           =============
</TABLE>

Maturities of long-term debt are as follows:

                  December 31, 1997                  $1,029,090
                  December 31, 1998                  $  966,087
                  December 31, 1999                  $  740,822
                  December 31, 2000                  $  619,942
                  December 31, 2001                  $  621,647
                  Thereafter                         $  454,123

Note 9. Related Party Transactions.

Through 1993 certain  directors  and  shareholders  made advances to the Company
bearing  interest at 10% per annum  aggregating  $195,350.  These  advances were
unpaid at December 31, 1994.  During 1995 $99,728 of these  advances were repaid
and the remaining balance was repaid in full in 1996.

During 1994 the Company  purchased raw materials  used at the Malvern,  AR plant
from a company that owned  533,333  shares of the $2 par value  preferred  stock
issued by the  Company to effect  the  purchase  of the  Malvern  facility.  The
purchases are considered to be at arms length and at prices and terms  available
from other suppliers of the material. Purchases aggregated $527,073 for the year
ended December 31, 1994.

During September, 1994 a shareholder of the Company entered into an agreement to
repurchase the 533,333 shares  described above for $250,000 payable in quarterly
payments  through  September,   1995.  During  January,  1996  this  shareholder
converted  these  shares and the  666,667  shares of  preferred  stock  which he
previously owned into common stock (see Note 13).

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


                                      -31-
<PAGE>

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  $42,667 of expense  for post  retirement  benefits  for the year ended
December  31, 1996 and  estimates  that its net  commitment  for the period from
January  1,  1997  to  August  31,  1999  pursuant  to  this  contract  will  be
approximately $864,000 for both salary and post retirement benefits.

On February  9, 1998,  the Company  was  informed  by an  executive  officer and
director of the Company of his  unauthorized  uses of Company funds.  There were
personal  expenses  in the amount of $8,176 that were  charged on the  Company's
credit card, and falsely  recorded in various  general ledger expense  accounts.
There were also personal  equipment  purchases with Company  checks,  which were
recorded  on the fixed  asset  listing  for  $73,075.  These  amounts  have been
reclassified to Notes Receivable - Officer,  and interest has been accrued using
the Company's cost of funds through  December 31, 1996. The balance  reported on
the fiscal 1996 financial statements is $92,423.

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.

During the fourth quarter of 1993 the Company began deferring  certain  payments
on the plant  lease due to  operational  problems  with the plant.  The  Company
maintained  that the  plant  did not  produce  the  quantities  of  formaldehyde
specified  in  the  lease  and  that a  renegotiation  of the  lease  terms  was
appropriate. The amount deferred at December 31, 1995 amounted to $510,070. This
amount  was  converted  to a  long-term  note  payable  as  described  above  in
connection with the purchase of the plant.

The Company has remaining  operating  leases for trucking and rail car equipment
which have fixed annual payments as follows:  $100,802 in 1997, $34,824 in 1998,
$33,000 in each year thereafter through 2001.

Rent expense was  $395,627,  $761,997 and $931,242 for the years ended  December
31, 1996, 1995 and 1994.

Note 11. Income Taxes

Deferred income taxes arise from temporary differences resulting from income and
expense  items  (principally  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.


                                      -32-
<PAGE>

Deferred tax assets and  liabilities at December 31, 1996 and 1995 resulted from
the following:


                                                    1996               1995


Deferred Tax Assets:
     Net operating loss                            $      -        $     98,300
     Postretirement benefit liability                14,507                   -
Deferred Tax Liabilities:
     Accelerated depreciation                       157,983             109,900


The  provision  for income taxes at December  31, 1996 and 1995  consists of the
following:

                                                   1996                1995

     Current                                   $    987,910        $     81,600
     Deferred                                        26,323              34,000
                                               ------------        ------------
                                               $  1,021,487        $    115,600

A  reconciliation  of the federal taxes at statutory  rates to the tax provision
for the year ended December 31, 1996 and 1995 is as follows:

                                                   1996               1995

     Federal statutory rate                    $    846,091        $    882,843
     State income taxes                             149,415             104,000
     Utilization of loss carryforward              (13,912)           (801,532)
     Surtax exemption                                -                 (11,750)
     Book/tax depreciation difference              (48,083)            (34,000)
     Post retirement benefits                        14,507                   -
     Other                                           73,469            (23,961)
                                               ------------        ------------
     Provision for income taxes                $  1,021,487        $    115,600

The Company did not record  income tax expense for the year ended  December  31,
1994 due to the loss incurred in that year.  The Company has fully  utilized its
net operating loss carryforward in the current year.

Note 12. Stockholders' Equity

During 1990,  the Board  authorized  5,000,000  shares of preferred  stock.  The
preferred  stock will be callable at the  discretion  of the Company at par ($2)
plus accrued dividends. The stock is convertible into two shares of common stock
after one year.  The conversion  rights will expire after five years.  Dividends
are  payable  at 200% of any  dividends  paid on  common  stock per  annum.  The
preferred  stock has  preference in liquidation to the common shares and has two
votes per share at shareholder meetings.


                                      -33-
<PAGE>

During  February,  1995 the Company  issued  100,000  shares of common  stock to
certain officers for services valued at $5,000.

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 $.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 $.55 for a ten year period.


Following is a summary of the transactions in the plan:

                                                                      Weighted
                                                    Shares         Average Price
         Balance December 31, 1994                         
         Granted                                    210,000             $.50
         Canceled                                         -
         Exercised                                        -      
                                                  ---------
         Balance December 31, 1995                  210,000             $.50
         Granted                                     75,000             $.55
         Canceled                                         -
         Exercised                                        -
                                                  ---------
         Balance December 31, 1996                  285,000             $.51

         Options available at
           December 31, 1996                        215,000

At December 31, 1996,  the Company also had the  following  other stock  options
granted in prior years outstanding:

        Description         Shares        Exercise Price        Expiration Date

        Shareholder         225,000           $.75                  01/21/97
        Shareholder         230,000          $1.00                  02/28/97

As of the  date  of the  financial  statements  none  of the  options  had  been
exercised.

The weighted  average fair value at the date of grant for options granted during
1996 was $.25 per option. The fair value of the options at the date of grant was
estimated using the Black-Scholes model with assumptions as follows:


                                      -34-
<PAGE>

            Market value                         $.51
            Expected life                          10
            Interest rate                        6.96%
            Volatility                          19.56%
            Dividend yield                       0.00%

No stock based  compensation  costs would be recorded by the Company as a result
of the foregoing.

During January,  1996 the holder of the 1,200,000  preferred shares described in
Note 9  converted  these  shares  into  2,400,000  shares  of common  stock.  In
connection with the recapitalization  described in Note 1, the Company agreed to
reacquire  80,000  shares  of  the  Air  Resources  Corp.  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 as
described in Note 14.

Note 13. 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, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>

                     Customer                   Sales/%                Receivable at 12/31
<S>                                      <C>                                 <C>
           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
                                                          
           1994:                                          
           International Paper           $5,147,000       17%                $156,000
           Union Camp                    $3,759,000       12%                $175,000
           Norbord                       $2,233,000        7%                $161,000
           Willamette                    $7,198,000       24%                $678,000
</TABLE>

Note 14. Commitments and Contingencies

On  September  16,  1996 the Company  contracted  to  purchase  land,  plant and
equipment owned by Niagara Mohawk Power  Corporation  (NMPC) located in the Town
of Bethlehem, New York. The Company intends to use the site to construct a third
processing  plant for the manufacture of adhesive resins and  formaldehyde.  The
contract specifies a purchase price of $775,000 for the premises and $65,000 for
equipment.  The contract also provides that the purchase  price for the premises
will be reduced to $1 should the Company promise to remediate the premises under
the direction of the New York State  Department of  Environmental  Conservation.
The Company has placed a $50,000  purchase  deposit in escrow  which will become
the property of NMPC should the Company not use its best  efforts to  effectuate
closing of the purchase by April


                                      -35-
<PAGE>

1, 1997.  The Company has  undertaken  discussions  with the state  conservation
agency and has prepared an estimate of the remediation costs associated with the
project,  which  estimate  projects  total  costs not in excess of the  contract
purchase price.

In  connection  with the plant  acquisition  described  above,  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.  Construction  will not begin until the Company has completed the NMPC
purchase or has secured another acceptable plant location.

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

The Company purchases substantially all of its three raw material components for
its resin,  formaldehyde,  and fertilizer  operations from four  suppliers.  The
Company purchased $15,158,111,  $19,232,831 and $20,136,843 from these suppliers
during  1996,  1995 and 1994 and had a  balance  due to them of  $1,089,433  and
$1,522,204 at December 31, 1996 and 1995.

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 15. 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  1996,  1995  and 1994  were  $132,476,
$113,114 and $128,376, respectively.


                                      -36-
<PAGE>


                                    PART III

Item 11.        Executive Compensation

         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>   
Irvine R. Spurlock, Chairman of the      1996       $179,880         --                (1)                   --
Board, President and Chief               1995       $186,725     $ 9,060(2)            (1)               50,000(3)
Executive Officer

Harold N. Spurlock, Vice President       1996       $170,130       50,000              (1)                   --
of Spurlock Adhesives                    1995       $194,500         --                (1)                   --


Phillip S. Sumpter, Executive Vice       1996       $141,942         --                (1)               50,000(3)
President and Chief Financial            1995          --            --                --                    --
Officer(4)

H. Norman Spurlock, Jr.                  1996       $178,835         --                (1)                   --
Executive Vice President and             1995       $181,966       9,060(2)            (1)               50,000(3)
Secretary
</TABLE>

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

(1)   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.
(2)   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.
(3)   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.
(4)   Represents  compensation  for Mr.  Sumpter's  employment  with the Company
      beginning April 1, 1996.

         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.


                                      -37-
<PAGE>

         (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 "Reasons for Amendment" above.)

         Option Grants,  Exercises and Holdings.  The following table sets forth
information  with  respect  to the grant of  options  made in 1996 to  executive
officers of the Company named in the Summary Compensation Table.

                     Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>

                                Individual Grants
                                -----------------                                        Potential Realizable 
                                                                                            Value at Assumed   
                                            Percent of                                      Annual Rates of    
                             Number of        Total                                           Stock Price      
                             Securities      Options         Exercise                       Appreciation for   
                             Underlying     Granted to        or Base                         Option Term      
                              Options        Employees       Price Per     Expiration         -----------
Name                          Granted        in 1996           Share          Date            5%       10% 
----                          -------        -------         ---------        ----            --       --- 
                                                                                               
                                                                                               

<S>                            <C>              <C>            <C>        <C>                 <C>      <C>
Phillip S. Sumpter             50,000           66%            $.55       July 11, 2006       $0       $0

</TABLE>

         No options were exercised by any of the Named Executive Officers of the
Company during the fiscal year ended December 31, 1996. The following table sets
forth information with respect to unexercised options held by them as of the end
of the fiscal year:
<TABLE>
<CAPTION>

                                              Fiscal Year End Options

                                              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> 
Irvine R. Spurlock                         50,000                _                   $0                  _
Phillip S. Sumpter                         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, 1996 per
      share and the exercise  price of the options  ($0.50 for Messrs.  Spurlock
      and Spurlock and $0.55 for Mr. Sumpter).


                                      -38-
<PAGE>

         Employment   Agreements.   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  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;


                                      -39-
<PAGE>

         (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.

         In addition,  the Company, Air Resources and Spurlock Adhesives and Mr.
Sumpter  have  entered  into  an  employment  agreement  that  provides  for his
employment as Executive Vice President.  The term of the agreement  commenced on
March 11, 1996 and will end on March 31, 1998. Under the agreement,  Mr. Sumpter
is entitled to receive annual base  compensation of $180,000 and is eligible for
additional  compensation  in the form of bonuses.  Mr. Sumpter may terminate his
employment at any time by giving 30 days' written notice of such termination.

         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 reflected in the Summary  Compensation Table above. The 1997 payment is
being 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 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 Board of Directors,  two of whom 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




                                      -40-
<PAGE>

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 or stock 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.  

         Irvine R.  Spurlock  became the  President and Chairman of the Board of
Directors of the Company in 1996.  Irvine  Spurlock's base salary for the fiscal
year ended  December  31,  1996 was  $179,880.  The salary was set  following  a
thorough  review and  evaluation by the Board of Directors of Irvine  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  Irvine  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. As of December 31, 1996, no committee has been designated by
the Board of Directors 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
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.


                                      -41-
<PAGE>

         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
1995  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

                                              Irvine R. Spurlock, Chairman
                                              Harold N. Spurlock
                                              H. Norman Spurlock, Jr.
                                              Phillip S. Sumpter
                                              Raymond G. Tuttle
                                              Glen S. Whitwer

         Compensation Committee Interlocks and Insider Participation.  The Board
of Directors does not have a compensation  committee.  Executive compensation is
examined  and  approved by the entire  Board of  Directors.  For the fiscal year
ended December 31, 1996, the Board of Directors  included the following officers
and employees of the Company and/or Air Resources 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.

         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, 1991.

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

         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.


                                      -42-
<PAGE>

Total Shareholder Returns (Dividends Reinvested)
------------------------------------------------

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

Company Name/Index                         1992            1993            1994            1995            1996
------------------                         ----            ----            ----            ----            ----

<S>                                       <C>            <C>             <C>             <C>             <C>   
S&P SmallCap 600 Index                    21.04%          18.79%         - 4.77%          29.96%          21.32%
Peer Group                                -2.32%          46.05%          39.84%          31.66%         - 8.56%
Spurlock Industries, Inc.                 83.33%         -93.18%           0.00%         333.39%         - 0.83%
</TABLE>


                                                INDEXED RETURNS ($)
                                             Years Ending December 31
<TABLE>
<CAPTION>
                                         Base
                                        Period
Company Name/Index                       1991        1992          1993         1994          1995         1996
------------------                       ----        ----          ----         ----          ----         ----

<S>                                       <C>        <C>           <C>          <C>           <C>          <C>   
S&P SmallCap 600 Index                    100        121.04        143.78       136.92        177.95       215.89
Peer Group                                100         97.68        142.66       199.50        262.66       240.18
Spurlock Industries, Inc.                 100        183.33         12.50        12.50        54.17         53.72
</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 13.        Certain Relationships and Related Transactions

         Certain  Related  Transactions.  Described below are obligations of the
Company which have been  personally  guaranteed by certain  executive  officers,
directors and  shareholders  of the Company.  All such personal  guarantees were
released  during  1996  due to the  repayment  of all  such  obligations  by the
Company.

         Pursuant to the Spurlock  Adhesives  Agreement,  Air Resources acquired
all of the stock of Spurlock Adhesives.  At the time of the acquisition,  Harold
N.  Spurlock,  formerly  Chairman of the Board,  President  and Chief  Executive
Officer of Air Resources and the Company,  personally guaranteed a large portion
of Spurlock  Adhesives'  debt,  including all debt then secured by real property
and/or  equipment and debt owed to its largest trade creditor.  Creditors at the
time agreed to allow the debt to remain  outstanding  after the  acquisition  of
Spurlock  Adhesives on the condition that Mr. Spurlock continue to guarantee the
debt, that he remain as Chairman of the Board of Spurlock Adhesives, and that he
be appointed  Chairman of the Board of Air  Resources.  Due to the  repayment of
amounts due to such creditors in 1996,  Mr.  Spurlock's  personal  guarantee has
been released and the  requirement  that Mr.  Spurlock  serve as Chairman of the
Board of the Company and Spurlock Adhesives is no longer applicable.



                                      -43-
<PAGE>

         In  addition  to  Harold  N.  Spurlock's   personal  guarantee  of  the
above-described  debt,  Irvine R.  Spurlock  and H. Norman  Spurlock,  Jr.,  the
Company's  current  Chairman,   President,  and  Chief  Executive  Officer,  and
Executive  Vice President and  Secretary,  respectively,  and Harold N. Spurlock
also had  personally  guaranteed  various other debts of the Company,  which has
succeeded to and assumed all the rights and obligations of Air Resources, and of
Spurlock Adhesives.  In May 1995, Irvine R. Spurlock and H. Norman Spurlock, Jr.
replaced a past director, Lloyd B. Putman, and a then serving director, Jesse A.
Adams,  as guarantors on a note with an Arkansas  bank. The loan in the original
principal  amount of $500,000  was taken out in August  1992 to provide  working
capital needed to operate the Company's facility in Malvern,  Arkansas. The note
was secured by certain real property and  equipment.  On or about June 30, 1996,
the note was repaid in full and each of the personal  guarantors  were  released
from any further obligation on the loan.

         Both  Harold  N.  Spurlock  and  his  wife,  Daphne  R.  Spurlock,  had
guaranteed  a loan from the Bank of Waverly  (Virginia)  secured by certain real
property  and  equipment   relating  to  the   construction   of  the  Company's
formaldehyde  plant  in  Waverly,  Virginia.  Mr.  and  Mrs.  Spurlock  also had
guaranteed a loan from First Union National Bank relating to the construction of
resin and formaldehyde production facilities in Waverly, Virginia. Both of these
loans were  repaid in full as of July 9, 1996 and June 30,  1996,  respectively,
and Mr. and Mrs.  Spurlock were each released from their personal  guaranties of
the loans upon such repayment.

         Harold N.  Spurlock,  Daphne R.  Spurlock  and Irvine R.  Spurlock  had
guaranteed  a  loan  from  a  trade  creditor,  Hydro  Agri  Tampa,  Inc.,  that
represented  trade debt  converted  to a note in 1991.  The note was  secured by
certain real property and equipment of Spurlock Adhesives.  As of June 24, 1996,
the note was repaid in full and each of the personal  guarantors  were  released
from any further obligation on the loan. Hydro Agri Tampa, Inc. was previously a
major supplier of urea to Spurlock  Adhesives,  but discontinued  supply of such
raw material into the United States in 1991.

         Each of Harold N. Spurlock,  Irvine R. Spurlock and H. Norman Spurlock,
Jr. also guaranteed  payments due under a lease with D.B. Western,  Inc. for the
Waverly,  Virginia  formaldehyde plant. On December 19, 1991, Spurlock Adhesives
entered  into a  Formaldehyde  Plant Lease with D.B.  Western,  under which D.B.
Western agreed to construct a fully operational  formaldehyde  plant at Waverly,
Virginia and lease the facility to Spurlock  Adhesives  for ten years at $55,000
per month, commencing at such time as the plant became mechanically complete and
ready for start up.  The lease  commenced  in  February,  1993.  In July,  1996,
Spurlock Adhesives  exercised its option to purchase the formaldehyde plant from
D.B.  Western  and  terminate  the D.B.  Western  lease.  As a part of  Spurlock
Adhesives'  acquisition  of the  formaldehyde  plant and the  termination of the
lease,  Spurlock  Adhesives  obtained  the  release  of  each  of  the  personal
guarantors  from any obligation  for lease  payments due under the D.B.  Western
lease. As of July 9, 1996, the amount of unpaid lease payments totaled $471,000.

         In connection  with the Company's  revolving  credit line instituted in
February 1995,  Harold N. Spurlock  provided a personal  guarantee as additional
security for all amounts borrowed under the facility, and Irvine R. Spurlock and
H. Norman Spurlock,  Jr. provided  limited  guarantees in the amount of $250,000
each.  As of June 28,  1996,  the credit line was repaid in full and each of the
personal  guarantors were released from any further  obligation on the loan. The
Company's current credit facility with the National Canada Finance  Corporation,
Richmond,  Virginia,  does not require the personal  guaranties of the Company's
officers and directors.

         Loan From Former Director and Officer.  During 1992 and 1993,  Lloyd B.
Putman, a former executive  officer of Air Resources who resigned from the Board
of Directors in September  1994,  loaned



                                      -44-
<PAGE>

Air Resources  $116,000.  The loan, the largest balance of which during 1996 was
$65,958,  bore  an  interest  rate  of 8%  per  annum,  payable  with  principal
quarterly,  and matured in December 1996. The loan related to monies advanced by
Mr.  Putman to Air  Resources'  gas recovery  operations  to help cover  ongoing
expenses for the development and production of gas recovery technology. The loan
was repaid in full as agreed on December 31, 1996.

         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 1996 was $112,500.  The balance
as of December  31, 1996 was  $82,500.  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 was repaid by Mr.  Spurlock on
October 15, 1997.

         (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 "Reasons for Amendment" above.)



                                      -45-
<PAGE>


                                     PART IV

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

       (a)      (1)      Financial Statements:

                         (i)      Report of Independent Auditors
                         (ii)     Consolidated Balance Sheets as of December 31,
                                  1996 and 1995
                         (iii)    Consolidated  Statements of Operations for the
                                  years ended December 31, 1996, 1995 and 1994
                         (iv)     Consolidated   Statements   of   Stockholders'
                                  Equity for the years ended  December 31, 1996,
                                  1995 and 1994
                         (v)      Consolidated  Statements of Cash Flows for the
                                  years ended December 31, 1996, 1995 and 1994
                         (vi)     Notes to Consolidated Financial Statements

                (2)      Financial Statement Schedules:  None.

                (3)      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.
  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.


                                      -46-
<PAGE>

  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.
  10.12*         Indemnification  Agreement,  dated  January  30,  1997  between
                 Spurlock Industries, Inc. and Raymond G. Tuttle.
  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**        Employment  Agreement  between the  Registrant,  Air  Resources
                 Corporation  and  Spurlock  Adhesives  Incorporated  [sic]  and
                 Phillip S. Sumpter dated March 11, 1996.   
  21*            Subsidiaries of the Registrant. 
  23.1**         Consent of Winter, Scheifley & Associates, P.C.  
  27**           Financial Data Schedule.  

*  Filed previously.
** 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 Registrant  required by
Regulation  S-X which were excluded from the Annual  Report to  Shareholders  by
Rule 14a-3(b).


                                      -47-
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements of Sections 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  Registrant  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  and  Exchange Act of
1934,  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, Chief Executive Officer and               April 15, 1998
 -------------------------------------    Director
           Phillip S. Sumpter             (Principal Financial and Executive 
                                          Officer)

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


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


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


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

</TABLE>


                                      -48-
<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.
   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.
   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.
   10.12*      Indemnification   Agreement,  dated  January  30,  1997,  between
               Spurlock Industries, Inc. and Raymond G. Tuttle.
   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.

                                      -49-
<PAGE>

   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**     Employment  Agreement  between  the  Registrant,   Air  Resources
               Corporation and Spurlock Adhesives Incorporated [sic] and Phillip
               S. Sumpter dated March 11, 1996.
   21*         Subsidiaries of the Registrant.
   23.1**      Consent of Winter, Scheifley & Associates, P.C.  
   27**        Financial Data Schedule.  


* Filed previously.
** Filed herewith.

                                      -50-