SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    FORM 10K

                  ANNUAL REPORT PURSUANT TO SECTION 113 OF 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934 

       For the fiscal year ended April 30, 1997, Commission File #0-8006


                              ENERGY RESERVE, INC.
             (Exact name of registrant as specified in its charter)
             ------------------------------------------------------

          Arizona                                               86-0220617
-------------------------------                            ------------------
(State or other jurisdiction of                            (IRS Employer
incorporation or organization)                               Identification #)

             100 West Clarendon, Suite 450, Phoenix, Arizona 85013
             -----------------------------------------------------
                (Address of Principal Executive Offices)

Registrant's telephone number, including area code: (602)  264-1897

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

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

                        Common stock, without par value
                        -------------------------------
                               (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 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 the past 90 days. Yes [X]  No [X]

State the aggregate market value of the voting stock held by non-affiliates  for
the  registrant's  (the aggregate market value shall be computed by reference to
the price at which the stock was sold,  or the average  bid and asked  prices at
which the stock was sold, or the average bid and asked prices of such stock,  as
of a  specified  date  within 60 days  prior to the date of  filing.)

                           $2,687,188 at July 1, 1997
--------------------------------------------------------------------------------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest  practicable  date  (applicable only to corporate
registrants.)
                          19,905,188 as of July 1, 1997
--------------------------------------------------------------------------------

Documents   incorporated   by  reference:   List  the  following   documents  if
incorporated  by reference and the part of the Form 10-K into which the document
is  incorporated:  (1) any annual report to security  holders;  (2) any proxy or
information  statement;  and (3) any prospectus filed pursuant to Rule 4249B) or
(C) under the Securities Act of 1933.  (The listed  documents  should be clearly
described for identification purposes.)

<PAGE>
                              ENERGY RESERVE, INC.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

      (a)  GENERAL DEVELOPMENT OF BUSINESS

      Energy  Reserve,  Inc.  (the  Company) has been  primarily  engaged in the
business of acquiring,  developing, and selling oil properties, and of producing
and  selling  crude oil for its own  account in the United  States.  As such the
Company has not and does not engage in refining or retail marketing  operations.
As of November 1, 1994 the Company  acquired  100 percent  ownership  of Transit
Services,   Inc.,  a  manufacturer  and  distributor  of  temperature  recording
instruments.

      The Company was  incorporated  as Mericle Oil Company in July 1968,  under
the laws of the Sate of Arizona. The name was changed to Energy Reserve, Inc. in
August,  1975. Its executive  offices are located at 100 West  Clarendon,  Suite
450, Phoenix, Arizona 85013, and its telephone number is (602) 264-1897.  Except
where the context  otherwise  indicates,  all references to the "Company" are to
Energy Reserve,  Inc. and its wholly owned  subsidiaries,  Twin-Chart,  Inc. its
wholly owned subsidiary  Transit  Services,  Inc., ERES Cogenics,  Inc.,  Energy
Reserve  Financial  Corporation,  Energy  Reserve  Holdings,  Inc.  and National
On-Site Check Cashing Inc. Of Arizona, a 75% owned subsidiary.

      (b)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

      The  Company  has two  industry  segments:  (1) crude oil  production  and
development;  and (2)  production  and  distribution  of  temperature  recording
devices.  The  following  table  summarizes  the assets,  revenues and operating
results  attributable to the Company's  operations by industry  segments for the
date and periods indicated.

                                            1997         1996           1995*
                                            ----         ----           ----
 Revenues
 (1) Oil production-Y/E 4/30             $    9,647   $      -0-    $       -0-
 (2) Temperature recorders-Y/E-4/30*     $7,444,170   $6,864,519    $ 3,010,282

 Operating profit or loss:
 (1) Oil production-Y-E 4/30             $1,013,248   $  116,138    $ (288,037)
 (2) Temperature recorders-Y/E-4/30*     $(142,607)   $   51,883    $  373,525

 Identifiable assets
 (1) Oil production-Y/E 4/30             $3,811,149   $3,756,947    $3,775,452
 2) Temperature recorders-4/30           $3,142,207   $2,798,723    $2,186,470

* The temperature recorder industry segment was not a part of Company operations
until 11/1/94 (6 months period).

      (c)  NARRATIVE DESCRIPTION OF BUSINESS

       OIL PRODUCTION OPERATIONS

      The Company's oil activities include the drilling of development wells and
the  development  and operation of such  properties for production of oil. Since
1980, the Company has principally financed these activities by borrowings, sales
of  non-operating  assets,  issuances of its common  stock and from  operations.
During the three years covered by this report the Company has only had crude oil
production or sales in March 1997, when production sales were reactivated..

      In 1986, as a means to maximize  production  through steam  enhancement of
its significant heavy crude (130 API) reserves,  the Company undertook a project
to construct a Cogeneration  (COGEN) and Thermal Enhanced Oil Recovery (TEOR) at
its oil  leases  in the  Chico-Martinez  field,  Kern  County,  California.  The
COGEN/TEROR facility as contracted with Pacific Gas & Electric Company(PG&E),  a
California public utility,  was a 45 MW project consisting of two phases;  Phase
One being  20.5 MW and  Phase  Two being  24.5 MW.  Problems  arose  with  PG&E,
principally  dealing with the power transmission  routing and  inter-connection,
which prevented the Company from meeting the contract deadline.

                                       2
<PAGE>

      The present status, including a complaint filed with the California Public
Utilities  Commission  against  PG&E,  and  the  future  plans  of  the  Company
pertaining to it oil production and the COGEN/TEOR operation are discussed under
the  respective  properties  captions  elsewhere  in this report  under Item 2.,
Description of Properties - Mitchel and Bacon Hills leases.  The Company's plans
to augment it's oil  operations in  California  include by late 1997, a 10 to 14
well enhanced oil recovery project at the Chico-Martinez Field. The project will
be a "Qualified  Enhanced Oil Recovery Project" as defined by the Omnibus Budget
Reconciliation  Act of 1990 with resultant  entitlements of substantial  federal
income tax benefits.  The  organizational  structure of the enhanced oil project
will be such as to enable investor financing of the project.

      Actual  drilling  operations  are not  undertaken by the Company,  but are
conducted by third-party drilling contractors.  The Company, however, may act as
operator  of such  projects,  thereby  supervising  exploration,  drilling,  and
production  activities.  Since 1980, virtually all of the Company's  development
activities  have been on its Kern County  Leases  which the Company  acquired by
cash and/or  issuance of shares of its common  stock to be held for  investment(
investment shares) .

      The  source  and  availability  of  raw  materials  are  not  critical  or
significant factors in the oil production operations of the Company.

      The operations of the Company are non seasonal

      The Company does not and is not required to carry  significant  amounts of
inventory  for its oil  operations  and neither  Company nor industry  practices
provide extended payment terms to customer.

      The oil operations of the Company are not dependent upon a single or a few
customers,  nor would the loss of any one  customer  have a  materially  adverse
effect upon the earnings or financial position of the Company.

      Backlog  of orders is not a factor  in the  crude  oil  operations  of the
Company.

      The oil and gas industry is extremely  competitive  and involves risk. The
Company is a minor factor in the  petroleum  and natural gas industry as regards
its development and production activities.  The ability of the Company to market
oil and gas produced from its propitious or from those which may be subsequently
acquired  depends  on  numerous  factors  beyond  the  control  of the  Company,
including  the extent of  production  and imports of oil and gas into the United
States, the proximity and capacity of oil and gas pipelines, the availability of
other transportation  facilities, the marketing of competitive fuels, the effect
of  governmental  regulations on the production of oil and gas and other matters
affecting the  availability  of a ready market,  such as fluctuation  supply and
demand.

      Governmental  agencies of the United States  maintain a close watch on the
ecological  impact of development  activities and the  possibility of ecological
disturbances.  Such measures may  substantially  increase the cost of developing
and  producing  oil and gas  and  may  prevent  or  delay  the  commencement  or
continuance of a given operation.  In the opinion management of the Company, its
operations comply with applicable legislation and regulations.  the existence of
such regulation has had no material  effect on the Company's  operations and the
cost of such  compliance  has not been material to date.  The cost and effect on
operations of compliance with future  environmental  laws and regulations cannot
be predicted,  and such measures may have an effect on the capital investment or
the net revenues resulting from the Company's activities.

      TEMPERATURE RECORDER OPERATIONS

      The Company's  temperature  recorder  activities  include  production  and
distribution of transit temperature  recording  instruments.  These instruments,
known as temperature recorders,  are self contained battery powered and designed
to created a graphical "time vs. temperature" record.

      The recorders are marketed  under the trade name Cox Recorders and produce
a record  which  is  documentary  proof of  temperature  conditions  useful  for
compliance  with  governmental   regulations,   the  monitoring  performance  of
refrigerated  carriers,  and for claims in the transport of valuable perishables
such as  produce,  meat,  pharmaceuticals,  chemicals,  live  plants  and animal
material.

      The Company  produces two separate graphic  recorders.  The COX1 and COBRA
are  single-channel  recorders  which record the air temperature in the truck or
container.  The COBRA is a new low-cost  recorder with a transparent  case which
allows viewing of the temperature  record without opening the case itself.  Both
are used primarily in transit monitoring of temperature variations.

                                       3
<PAGE>

      In  addition  to  these  graphic   temperature   recorders,   the  Company
manufactures an electronic  temperature  recorder,  or "data logger",  named the
LYNX.  The  LYNX  delivers  its  data via a cable  link to a PC  computer  using
specialized software. LYNX is used in quality control and safety applications in
the foods industries and also in shipping.  The shipping  configuration is a new
design with an integral mailer pack that has patents pending.

      The  source  and  availability  of  raw  materials  are  not  critical  or
significant factors in the temperature recorder operations of the Company.

      The temperature recorder operations of the Company are non seasonal.

      The Company does and is required to carry significant amounts of inventory
for its  temperature  recorder  operations  and  neither  Company  nor  industry
practices provide extended payment terms to customers.

      The temperature  recorder operations of the Company are not dependent upon
a single  or a few  customers,  nor would  the loss of any one  customer  have a
materially  adverse  effect  upon  earnings  or the  financial  position  of the
Company.

      Backlog  of  orders  is not a major  factor  in the  temperature  recorder
operations of the Company.

      The Company is a major competitor in the temperature recording industry as
regards its production and distribution activities.

      The Company does not maintain  company owned  distribution  entities.  All
distributors  are on contract and major  distributors are located in Copenhagen,
Singapore and Melbourne. All other distribution and sales operations are through
individual sales persons  operating on a sales commission basis or a salary plus
incentive basis.

      The product lines include a portable  penetration  probe thermometer which
is retailed  but not  manufactured  by the Company.  The Company  also  performs
contract manufacturing.

      The COX1 product accounts for 90% of the Company's  business.  The balance
is due to probes and retail sales of other temperature monitoring products which
are not  manufactured.  The COBRA and LYNX  products are new and no  substantial
volume has yet been achieved.

ITEM 2. DESCRIPTION OF PROPERTIES

      The  Company  owns  working  interests  in certain  developed  oil and gas
properties in the United  States.  Developed  acreage  consists of properties on
which oil and gas wells have been drilled  which are capable of producing  crude
oil or natural gas.

      The Company's  principal oil and gas  properties are the Mitchel and Bacon
Hills leases previously  referred to in this report.  Following is a description
of each of these principal oil and gas properties:

      MITCHEL LEASES

      These  subleases,  located  in  the  Chico-Martinez  field,  Kern  County,
California,  were acquired in 1969 and consist of 380 acres in which the Company
has interests to a depth of 2,000 feet on 320 acres and to a depth of 2,500 feet
on 60  acres.  The  Company  owns a 78.33  percent  working  interest  in  these
subleases,  with 52  completed  oil wells which were  unitized in 1976 and which
produce  from the 500 to 1,600 foot  levels.  Production  interest  of others in
these wells was 1.1 percent at April 30, 1995,  1996 and 1997.  The oil produced
is heavy crude of  approximately  12.7 API gravity.  The Company has no drilling
requirements  under the subleases,  which are held by  production.  There was no
crude oil production on these leases during the three years ended April 30, 1997
until March 1997.

      BACON HILLS LEASE

      In March  1990,  the  sublessor  declared  this  sublease  terminated  and
requested return of the underlined portion of the sublease. The Company does not
acknowledge  the  declaration  of  termination  and has not  complied  with  the
sublessor's request. To date, no litigation,  action or further request has been
undertaken  by the  sublessor  in a  connection  with this  matter.  The Company
retains  and holds  five acre well  tract and the oil and gas  rights to each of
fourteen wells drilled on this sublease.

                                       4
<PAGE>

      This  sublease,   located  in  the  Chico-Martinez   field,  Kern  County,
California,  was acquired in December,  1980 and consists of  approximately  260
acres,  1 which  the  Company  has  interests  to the depth of 5,000  feet.  The
landowners'  and  overriding  royalty  interest  holders are identical  with the
Mitchel  leases  which total 21.67  percent and the Company  owns the  remaining
78.33 percent working  interest in this lease. The acquisition of this sublease,
in conjunction with the Mitchell subleases,  provided the Company with an entire
leasehold interest in a full section of land.

      Under the terms of this sub-lease,  the Company  committed to the drilling
of an initial six wells on or before March 31, 1982, and at least six additional
wells each 12-month period thereafter, until at least 52 wells have been drilled
without  regard to whether  they are  producing  or  abandoned.  The Company has
drilled a total of 14 wells under its commitment.  No wells have been drilled on
this lease since 1984.

      COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION

      As previously mentioned in 1(a) and (c), the major activity of the Company
during the past ten years has been  directed  toward the  implementation  of the
COGEN/TEOR  Project on the Mitchel  leases which would be capable of serving the
combined Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery
operations  and provide  for the sale of power to a  California  public  utility
company. ERES Cognacs, Inc., a wholly owned subsidiary was formed in August 1987
to be the  builder/owner/operator  of the  COGEN/TEROR  facilities.  The Company
signed a power purchase  agreement with Pacific Gas and Electric Company for the
delivery to the utility of 20.5  megawatts of  electricity  by a date no earlier
than June 1, 1989 and no later than  December 24, 1991.  The  agreement  further
provided  for  delivery  and  purchase of up to 45  megawatts  of power in later
years.  Contracts were signed for negotiated  with  responsible  and experienced
suppliers,  supervision, natural gas delivery, maintenance and operation and the
TEOR  installation,  including  the  laying of steam  lines for the steam  flood
operations.

      As stated  earlier in 1(c) under oil  operations,  certain  problems arose
with the public  utility which  rendered the Company unable to satisfy the power
purchase  contract  requirements  by the December 24, 1991 deadline.  The public
utility denied a request for deferral of the deadline date.

      The  Company  filed  a  complaint  with  the  California   Public  Utility
Commission (CPUC) requesting  continuation of the power purchase agreement.  The
matter was heard by the CPUC in October  1993 and a decision in this  litigation
is still  pending as of the date of this report  Refer to Note M,  "Commitments,
litigation and contingencies" of the Notes to Consolidated  Financial Statements
incorporated herein by reference.

      The  Company  intends  to  continue  operations  and  development  of  the
Chico-Martinez  oil field  regardless of the outcome of the complaint filed with
the CPUC and as previously  stated, the Company proposes to accomplish this with
a "Qualified  Enhanced Oil Recovery  Project"  presently being structured by the
Company.

      The tables  below set forth by State the gross and net  developed  acreage
and  the  gross,  net,  and  revenue  net  productive  wells  of all oil and gas
properties of the Company at April 30, 1997.

      (a) "Gross  Acreage"  represents all acres in respect to which the Company
has a working  interest,  "Net Acreage"  represents the aggregate of the working
interest of the Company in the gross acreage.
                                               Acreage (a)
                                          --------------------
                                             Gross
   Location         Held By      Expires   Developed      Net
   --------         -------      -------   ---------      ---
 California
   Mitchel        Production   Indefinite   380.00       297.65
*Bacon Hills      Production   *             70.00        54.83
                                            ------       ------
                                            450.00       352.48

* Reference  is made to the  descriptions  of the Mitchel and Bacon Hills leases
previously  discussed  in this Item 2  concerning  the  status of the leases and
certain  drilling   commitments  required  of  the  Compnay  pertaining  to  the
California leases.

                                       5
<PAGE>
      (b) "Gross Wells"  represents  the total number of wells which the Company
has a working  interest;  "Net  Wells"  represents  the  number  of gross  wells
multiplied  by the  percentages  of the working  interests  therein owned by the
Company.  "Revenue Net Wells" represents the number of gross wells multiplied by
the percentages of the  participating  production  interests therein retained by
the Company.
                                    OIL WELLS

                                                      Revenue
          Location             Gross         Net        Net
          --------             -----         ---        ---
         California            62.0         48.6       48.6

      During the past five fiscal years,  the Company has not drilled any oil or
gas wells.

      The Company is not obligated under any existing contracts or agreements to
provide a fixed and determinable quantity of oil and gas in the future.

      The latest independent  petroleum studies and reports for the Kern County,
California  leases  were by  Douglass  Petroleum  Management  Co.,  Bakersfield,
California  as follows:  (1)  Comprehensive  Reservoir  Engineering  Study dated
February  1986 which  estimated  the  recoverable  oil  reserves  at  21,103,341
barrels,  and (2) a Steam  Flood  Development  Plan,  dated June 1987 which sets
forth a plan  including  drilling and  production  costs for recovery of the oil
reserves.  The Company has not filed any reports  concerning oil and gas reserve
estimates  with any  regulatory  authorities or agency other than the Securities
and Exchange Commission.

      The net production of oil and gas for each of the last five years is shown
below.  Net  production  represents  the gross  production  after  deduction for
royalties of other parties.

                                    OIL/BBDS
                                    --------
                           1997                500
                           1996                - 0 -
                           1995                - 0 -
                           1994                - 0 -
                           1993                - 0 -

      None of the net  production  during each of these years is  applicable  to
long-term supply or similar  agreements with foreign  governments or authorities
in which the Company acts as producer.

ITEM 3. LEGAL PROCEEDINGS

      Disclosure  of legal  proceedings  is contained  in Note M,  "Commitments,
litigation and contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

      Not applicable.

                                    PART II

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

      (a)  MARKET INFORMATION FOR COMMON STOCK

      The Company's  common stock is traded in the  nationwide  over-the-counter
market  and is listed in the pink  sheets  provided  by the  National  Quotation
Bureau, Inc.

      The range of high and low bid quotations for each quarterly  period during
the past four years  ended  April 30,  based upon  information  provided  to the
Company by the National  Association  of Securities  Dealers or market makers in
the Company's stock, was as follows:

                                       6
<PAGE>

                         1997           1996           1995              1994
                    ------------------------------------------------------------
                     HIGH    LOW    HIGH   LOW    HIGH    LOW      HIGH     LOW
                     ----    ---    ----   ---    ----    ---      ----     ---
First Quarter         1/4    1/4    5/8    3/8    3/16    7/64     3/16     7/8
Second Quarter      1 1/4    1/8    5/8    5/16   3/16    1/8      3/16     1/8
Third Quarter        13/16   3/8    5/8    5/16   7/16    3/16     3/16     1/8
Fourth Quarter        3/4    3/8    1/2    5/16   5/8     3/8      3/16     7/64

      (b)  APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

      As of April 30, 1997 the  approximate  number of holders of record of each
class of equity securities of the Company was as follows:

      Common Stock, no par value  3,000 (1)

      (1)  Included in the number of  stockholders  of record are shares held as
           "nominee" or "street name.

      (c)  DIVIDENDS

      The Company has not  declared  any  dividends  during the past three years
ended April 30, 1995 through 1997.

ITEM 6.  SELECTED FINANCIAL DATA

      Following  is a summary of  selected  financial  data for each of the last
three fiscal years ended April 30:


                                    1997             1996             1995
                                    ----             ----             ----
Operating Revenues               $7,453,817       $6,864,519       $3,010,282

Profit (loss) from 
 continuing operations            1,004,333          207,638          196,381

Profit (loss) from 
 continuing operations 
 per common stock                      0.05             0.01             0.01


Total assets                      6,953,356        6,555,670        5,961,922

Long-term obligation                358,686          465,895          165,242

Cash dividends declared 
 per common share                       -0-              -0-              -0-

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

      LIQUIDITY AND CAPITAL RESOURCES

      Based upon its Twin-Chart subsidiary's operations and the proven developed
and the undeveloped  reserves of the Mitchel and Bacon Hills leases, the Company
anticipates cash from operations,  equity investment,  production  participation
sales,  and  borrowing  from  long-term  lending  sources  adequate to meet cash

                                       7
<PAGE>

requirements.  At present,  cash flow from  operations  is adequate to meet cash
requirements  and  commitments of the Company.  However,  the Company intends to
enter into  equity,  debt of other  financing  arrangements  to meet its further
financial needs for expansion and:

          (a)  To resume and continue  drilling and work over  activities at its
               Chico Martinez oil field.

          (b)  To repay outstanding current liabilities;

          (c)  To provide for general working capital needs;

      COMPARISON OF OPERATIONS FOR 1997 AND 1996

      Operations  for the years ended April 30, 1997 resulted in a net profit of
$870,641. This is a $702,618 or 418% improvement over the prior year ended April
30, 1996.

      This gain was primarily the result of increased  income from operations of
$499,714 and a $296,981 improvement in other income sources.

      The  following  schedule  reflects the two company  segments for the years
ended April 30, 1997 and 1996:

                                     Y/E 1997                 Y/E 1996
                           ------------------------   ------------------------
                              Oil       Temperature      Oil      Temperature
                           Production    Recorders    Production   Recorders
                           ----------    ---------    ----------   ---------
Previous Sales             $    9,647                $     -0-    $6,864,519
Management fees             1,117,291                  480,000           -0-

Cost of sales                   3,649   3,472,256        6,715     3,525,156

General & Admin                88,915   2,862,982       62,076     2,129,384
Sales Expense                     -0-   1,052,164          -0-     1,004,953
Interest                       24,249      40,851       45,709        42,028
Depreciation                    3,977      39,946        3,977        39,116

Income(loss) opens          1,006,148     (21,029)     361,523       123,882
Other income (expense)        140,792    (121,578)    (245,387)      (32,380)
Income taxes                  133,692         -0-          -0-        39,617

Net earnings (loss)        $1,013,248  $ (142,607)   $ 116,138    $   51,885

      OIL PRODUCTION

      The oil  production  segment  reflects a net  earnings  for the year ended
April 30, 1997 of  $1,013,248  as compared to a net earnings of $116,138 for the
prior year. This $839,110 improvement is due to the management fee income to the
parent corporation from its subsidiary temperature recorder corporation.

      Th only  oil  production  sales  for  either  of the past  two  years  was
approximately  500 bonds sold in March  1997.  As  disclosed  elsewhere  in this
report,  the oil field  operations  have been  inactive for several years due to
litigation involving the Company's  cogeneration project.  Production operations
have been reactivated in the last quarter of the 1996-1997 fiscal year.

      General and administrative expenses increased $26,839 or 43% due primarily
to legal  costs of $8,000 and  increases  in  salaries,  rentals  and  insurance
expenses of approximatley $19,000.

      Interest expense  declined due to debt reduction.  Other income in 1997 of
$140,792  was the  result  of the  settlement  of  liabilities  at less than the
recorded liability.

                                       8
<PAGE>

      TEMPERATURE RECORDERS

      Sales were up approximately 8.5% for the current year over the prior year.
There was a slight decrease in cost of sales..  These two factors resulted in an
improvement  in gross margin on sales by $632,551 for 1997.  The gross margin on
sales in 1997 was $3,971,914 as compared to $3,339,363 for 1996.

      All categories of operating  expenses,  except general and  administrative
expense,  remained  relatively  constant  between the two years. The increase in
general  and  administrative  expense  was  due  primarily  to the  increase  in
management fees to the parent corporation

      Reference is made to Note 1 - Acquisition of Twin Chart, Inc., of notes to
Consolidated  Financial  Statements which sets forth comparative  operations and
financial  statements  which sets forth  comparative  operations  and  financial
statements of that corporation for the year ended April 30, 1997 and 1996.

      COMPARISON OF OPERATIONS FOR 1996 AND 1995.

      Operations  for the years ended April 30, 1996 resulted in a net profit of
$168,021.  This is an  $82,533  or 96.5%  improvement  over the prior year ended
April 30, 1995.

      This gain was  primarily  the result of a  twelve-month  operations of the
temperature  recorder  subsidiary  for the 1995-1996  year as compared to only a
six-month period of operations for the 1994-1995 year.

      The  following  schedule  reflects the two company  segments for the years
ended April 30, 1996 and 1995.

                                     Y/E 1996                 Y/E 1995
                          ------------------------   ------------------------
                             Oil       Temperature      Oil      Temperature
                          Production    Recorders    Production   Recorders
                           ----------    ---------    ----------   ---------
Previous Sales            $    -0-     $6,864,519     $    -0-    $3,010,282
Management fees            480,000            -0-          -0-           -0-

Cost of sales                6,715      3,525,156        33,812    1,210,920

General & Admin             62,076      2,129,384       224,329      768,872
Sales Expense                  -0-      1,004,953           -0-      470,291
Interest                    45,709         42,028        39,344       14,317
Depreciation                 3,977         39,116         3,195       24,021

Income(loss) opens         361,523        123,882      (300,680)     521,861
Other income (expense)    (245,387)       (32,380)       13,443      (38,243)
Income taxes                   -0-         39,617           800      110,093

Net earnings (loss)      $ 116,138     $   51,885     $(288,037)  $  373,525

      The oil  production  segment  reflects a net  earnings  for the year ended
April 30, 1996 of  $116,138 as compared to a net loss of $288,037  for the prior
year.  This  $404,175  improvement  is due to the  management  fee income to the
parent corporation from its subsidiary temperature recorder corporation.

      There were no oil  production  sales for either of the past two years and,
as  disclosed  elsewhere  in this  report,  the oil field  operations  have been
inactive  for  several   years  due  to   litigation   involving  the  Company's
cogeneration project.

      All  categories  of operating  expense  except  interest and  depreciation
expense  declined for the current year as compared to the prior year.  There was
reduced  maintenance  costs at the field and the executive  salaries,  legal and
accounting  expense  reductions  accounted  for  the  decrease  in  general  and
administrative expense.

      Other expense of $245,387 for the year ended in 1996 was the result of the
sale of securities at a realized  loss of $275,732.  The company had  previously
provided  a  charge  to  equity  of  $287,850  as an  unrealized  loss on  these
securities as of April 30, 1995.

                                       9
<PAGE>

      The temperature recorder operations of the Company for the two years ended
April 30, 1996 and 1995 do not contain  comparative  periods of operations.  The
year  ended in 1995  contains  only seven  months,  while the year ended in 1996
contained twelve months.  Reference is made to Note H-Acquisition of Twin-Chart,
Inc., of Notes to Financial  Statements which sets forth comparative  Statements
of Income and Retained  Earnings of that  corporation  for the years ended April
30, 1996 and 1995. As disclosed by Note H, there is an annual  increase in sales
which is due to  expanding  markets  and an  increased  market  share by the Cox
recorders.  The increase in general and administrative  expenses of $480,795 for
1996 over 1995 was attributable to the management fee to the parent corporation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See Part IV

ITEM 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE

      None

TEM 10. DIRECTORS AND EXECUTIVE OFFICERS

      (a)   IDENTIFICATION OF DIRECTORS

      The following table lists certain information  concerning the directors of
the Company:

Name, Positions and                  Director    Term      Certain Other
Offices With Registrant       Age    Since       Expires   Corporations
-----------------------       ---    -----       -------   ------------
Alfred P. Sprenger,
Chairman of the Board
and Chief Executive Officer   69      1968        (1)         (2)

James L. Cox,
President and Chief
Operating Officer             52      1995        (1)         (3)

(1) Serve until next meeting of the Company's stockholders.
(2) Serves  as the sole  trustee  of the  Liquidating  Trusts  for  Progressive
    Investment Corporation (PIC) and PIC Research & Development Corp.
(3) Serves as President and Chief Executive Officer of the Company's subsidiary,
    Twin-Charts, Inc.

      (b)   IDENTIFICATION OF EXECUTIVE OFFICERS
                                                             Executive
Name, Positions and                  Director    Term      Certain Other
Offices With Registrant       Age    Since       Expires   Corporations
-----------------------       ---    -----       -------   ------------
Alfred P. Sprenger,
Chairman of the Board
and Chief Executive Officer   69      1969         (1)         (2)

James L. Cox,
President and Chief
Operating Officer             51      1995         (1)         (3)

David Caskey
Secretary-Treasurer           35      1997         (1)         (4)

(1)  Serves until replaced by the Board of Directors.
(2)  Serves  as the sole  trustee  of the  Liquidating  Trusts  for  Progressive
     Investment Corporation (PIC) and PIC Research and Development (PIC & R&D).
(3)  Serves as President and Chief  Executive  Officer of Company's  subsidiary,
     Twin-Chart, Inc. and Transit Services, Inc.
(4)  Served as Secretary-Treasurer of Company's subsidiaries,  Twin-Chrt,  Inc.,
     and Transit Services, Inc.

                                       10
<PAGE>

      (c) BUSINESS EXPERIENCE

      Mr.  Alfred  Sprenger  has  been a  director  of  the  Company  since  its
incorporation.  He served  in the  capacity  as  President  and Chief  Operating
Officer from 1969 to August 1, 1995.  He served in identical  capacities  in the
two affiliated  corporations,  Progressive  Investment Corporation (PIC) and PIC
Research and  Development  (PIC R&D) until  December  1983 and now serves as the
trustee of the Liquidating Trusts for PIC and PIC and R&D.

      Mr. James Cox has been an officer and director of the Company since August
1, 1995. He has served in the capacity of President and Chief Operating  Officer
from that date to the present. He has served in identical  capacities in the two
subsidiary  corporations,  Twin-Chart,  Inc., and Transit Services,  Inc., since
1986  and  from  1977  to  1986,  he  served  as  Sales  Manager  and  Executive
Vice-President  of  Transit  Services,  Inc.  He  holds  a Ph.D.  from  Stanford
University  and has held  various  teaching  and  research  positions  with Duke
University,  Stanford  Research  Institute and University of  California,  Santa
Barbara.

      In September 1996, Mr. David Caskey was elected Secretary/Treasurer of the
Company to replace Roger Sherer,  who died in August 1996. Mr. Caskey has served
as Secretary/Treasurer in the two subsidiary corporations, Twin-Chart, Inc., and
Transit Services, Inc., since 1990. He holds a B.A. degree from Long Beach State
University and has been with the subsidiary corporations since 1987.

      (d)   INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

      Disclosure  of legal  proceedings  is  contained  in Note M  "Commitments,
Litigation and Contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.

ITEM II. MANAGEMENT REMUNERATION AND TRANSACTIONS

            (a)  Remuneration,  on an  accrual  basis,  paid  to  the  executive
officers and directors of the Company  during the year ended April 30, 1997, was
as follows:
                                       (C)
                            Cash and Cash Equivalents
                              Forms of Remuneration

                                                       (C-2)
                                                     Securities
                                                    Or Property
                                        (C-1)        Insurance       Aggregate
      (A)                          Salaries, Fees   Benefits Or        Of
Name Of Individual        (B)      Director's Fees Reimbursement   Contingent
Or Number Of         Capacities In  Commissions,     Personal         Forms Of
Persons In Group     Which Served   And Bonuses      Benefits       Remuneration
----------------     ------------   -----------      --------       ------------
Alfred P. Sprenger   Chairman of         -0-           None            None
                     the Board &
                     CEO

James L. Cox         Director,      $114,725           None            None
                     President &
                     COO

David Caskey         Director &      $65,000           None            None
                     Sec.-Treas.

Three                All officers   $179,725           None            None
                     & Directors

      (b) The Company does not have future plans to pay  remuneration,  directly
or  indirectly,  to any of the above  officers  or  directors  other that direct
salaries and bonuses as authorized by the Board of Directors.

                                       11
<PAGE>

      (c) The directors of the Company do not receive  compensation  for serving
in their  capacity  other than  reimbursement  of expenses  incurred  related to
company business.

      (d)  Transactions  with management are disclosed in Note L of the Notes to
Consolidated Financial Statements incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  following  table show as of April 30,  1997 the  effective  number of
shares of common stock of the Company  owned by every person owning of record or
known  by  the  Company  as  owning  beneficially  more  than 5  percent  of the
outstanding common stock.

      (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (CONTINUED)

      The  number  of  shares  and  percentage  ownership  represents  effective
ownership  in  the  Company,   including   ownership   through  the   affiliated
corporations  liquidating trusts,  Progressive  Investment Corporation (PIC) and
PIC research and Development (PIC R&D).

(1)                                                                   (4)
Title             (2)                            (3)                Percent
 of        Name and Address              Amount and Nature of         of
Class      Beneficial Owner              Beneficial Ownership        Class
-----      ----------------              --------------------        -----
Common     Alfred P. Sprenger            895,800 shares               4.5%
stock,     Energy Reserve, Inc.              Record
no par     100 W. Clarendon
           Suite 450
           Phoenix, AZ

Common     PIC Liquidating Trust          256,885 shares              1.9%
stock,     100 W. Clarendon            Record and Beneficial
no par     Suite 450
           Phoenix, AZ

Common     PIC R&D Liq. Trust            88,015 shares                1.2%
stock,     100 W. Clarendon                 Record
no par     Suite 450
           Phoenix, AZ

Common      James L. Cox                 4,587,000 shares            23.3%
stock,      100 W. Clarendon                 Record
no par      Suite 450
            Phoenix, AZ

Common     Other Related Parties*        5,226,304 shares            28.8%
stock,                                 Record and Beneficial
no par

*    Comprised of  individuals  being certain  Company  employees and relatives,
     friends and business associates of Mr. Sprenger.

      For  further  information  concerning  ownership  interests,  see  Note L,
"Related-party  Matters,  Ownership  Interests,"  of the  Notes to  Consolidated
Financial Statements, incorporated herein by reference.

                                       12
<PAGE>

      (b)  SECURITY OWNERSHIP OF MANAGEMENT

      The following  table shows as of April 30, 1997, all shares of the Company
stock and that of the affiliated corporations  liquidating trusts, PICLT and PIC
R&DLT,  beneficially owned by the three officers and directors of the Company as
a group:

(1)                                                               (4)
Title             (2)                        (3)                Percent
 of        Name and Address          Amount and Nature of         of
Class      Beneficial Owner          Beneficial Ownership        Class
-----      ----------------          --------------------        -----
Common     Energy Reserve, Inc.           5,482,800              27.8%
stock,
no par

Common     PIC Liquidating Trust               -0-
stock,
no par

Common     PIC R&D Liq. Trust                  -0-
stock,
no par

                                     PART IV


ITEM 13.  FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
          REPORTS ON FORM 8-K

     (a)  DOCUMENTS FILED AS PART OF THIS REPORT


     LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

     Consolidated Financial Statements:
          Balance sheets--April 30, 1997 and April 30, 1996
          Statement of operations  and  accumulated  deficit for the years ended
          April 30, 1997, 1996 and 1995
          Statement of  shareholders'  investment  for the years ended April 30,
          1997, 1996 and 1995
          Statement of cash flows for the years ended April 30,  1997,  1996 and
          1995

      (b)   REPORTS ON FORM 8-K

      The  following  Forms  8-K have  been  filed by the  Company  for the year
covered by this report ended April 30, 1997:

          None

                                       13
<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities  Exchange Act
of 1934,  the  Company  has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated:
                                   ENERGY RESERVE, INC.,
                                   an Arizona Corporation

7-19-97                            By /s/ ALFRED P. SPRENGER
                                     ----------------------------------
                                          Alfred p. Sprenger, Chairman of
                                          the Board & Chief Executive Officer

7-19-97                            By /s/ JAMES L. COX
                                     ----------------------------------
                                          James L. Cox, President and
                                          Chief Operating Officer

7-19-97                            By /s/ ROBERT W. DUPREE
                                     ----------------------------------
                                          R.W. Dupree, Controller and
                                          Chief Financial Officer


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of the Company
and in the capacities and on the dated indicated:

Dated:                                   Signature


7-19-97                              /s/ ALFRED P. SPRENGER
                                     ----------------------------------
                                         Alfred p. Sprenger,
                                         Chairman

7-19-97                              /s/ JAMES L. COX
                                     ----------------------------------
                                         James L. Cox,
                                         President and Director

                                       14
<PAGE>
                      ENERGY RESERVE, INC. AND SUBSIDIARIES

              REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED APRIL 30, 1997 AND APRIL 30, 1996


<PAGE>

                                    CONTENTS


                                                                          PAGE
                                                                          ----
Independent Auditors' Report ..........................................    1

FINANCIAL STATEMENTS

    Consolidated Balance Sheets........................................    2

    Consolidated Statements of Income and Accumulated Deficit..........    3

    Consolidated Statements of Stockholders' Equity....................    4

    Consolidated Statements of Cash Flows..............................  5-6

    Supplemental Schedule of Non-Cash Investing and
      Financing Activities.............................................    7

    Notes to Consolidated Financial Statements ........................ 8-34

<PAGE>

                       [LETTERHEAD OF BEDINGER & COMPANY]


                          INDEPENDENT AUDITORS' REPORT


                                                                   June 19, 1997

Board of Directors
ENERGY RESERVE, INC.
Phoenix, Arizona

We have audited the accompanying  consolidated balance sheets of Energy Reserve,
Inc., as of April 30, 1997 and 1996, and the related consolidated  statements of
income and  accumulated  deficit and of cash flows for the years ended April 30,
1997, 1996 and 1995. 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 audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Energy  Reserve,
Inc.,  at April 30, 1997 and 1996,  and the results of its  operations  and cash
flows for the years ended April 30,  1997,  1996 and 1995,  in  conformity  with
generally accepted accounting principles.

                                                 by /s/ Bedinger & Company
                                                    ----------------------------
                                                    Certified Public Accountants

<PAGE>
ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

                                                             April 30
                                                   ----------------------------
ASSETS                                                 1997            1996
                                                   ------------    ------------
CURRENT ASSETS:
  Cash and cash equivalents                        $  1,118,019    $    614,356
  Accounts receivable, less allowance for doubtful
    accounts of $30,000 and $25,000 at April 30,
    1997 and 1996, respectively                       1,131,873         896,681
  Inventory (Note B)                                    757,492         744,724
  Investment in securities (Note C)                      64,500         270,000
  Notes receivable - current portion (Note D)            39,579          65,174
  Prepaid expenses                                       10,508           8,811
                                                   ------------    ------------
             TOTAL CURRENT ASSETS                     3,121,971       2,599,746

  Property and equipment (Net) (Note E)               3,748,808       3,728,938
  Deferred taxes (Notes A and F)                              0         167,411
  Deposits                                                3,890           3,890
  Goodwill (Notes A, I and J)                            78,687          55,685
                                                   ------------    ------------
             TOTAL ASSETS                          $  6,953,356    $  6,555,670
                                                   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and accrued expenses (Note G)   $    489,740    $    696,285
  Income taxes payable (Note F)                             400             400
  Current portion of long-term debt (Note H)            585,859         577,234
                                                   ------------    ------------
                                                      1,075,999       1,273,919
  Long-term debt (Note H)                               358,686         465,895
  Minority interest (Note J)                              2,674
                                                   ------------    ------------
                                                      1,437,359       1,739,814
COMMITMENTS AND CONTINGENCIES (Note M)

STOCKHOLDERS' EQUITY
  Common stock, no par value; authorized-
    100,000,000 shares; issued and outstanding;
    19,905,188 shares at April 30, 1997 and
    19,555,188 shares at April 30, 1996              20,041,562      20,006,562
  Contributed Capital                                   220,872         220,872
  Accumulated deficit                               (13,665,287)    (14,535,928)
  Unrealized loss on available-for-sale
    securities (Note C)                                (205,500)
  Less - Notes receivable for common
    stock issued (Notes K and L)                       (875,650)       (875,650)
                                                   ------------    ------------
       TOTAL STOCKHOLDERS' EQUITY                     5,515,997       4,815,856
                                                   ------------    ------------

       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $  6,953,356    $  6,555,670
                                                   ============    ============

                        See Notes to Financial Statements

                                       2
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS  ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


                                                  Year Ended April 30
                                      ---------------------------------------
                                          1997         1996          1995
                                          ----         ----          ----
REVENUE:
  Sales                               $7,453,817    $6,864,519    $3,010,282
                                      ----------    ----------    ----------

         TOTAL REVENUE                 7,453,817     6,864,519     3,010,282
                                      ----------    ----------    ----------

COSTS AND EXPENSES
  Cost of sales                        3,475,905     3,531,871     1,244,732
  General and administrative expenses  1,834,606     1,711,460       993,201
  Sales expense                        1,052,164     1,004,953       470,291
  Interest expense                        65,100        87,737        53,661
  Depreciation and amortization           40,923        43,093        27,216
                                      ----------    ----------    ----------
         TOTAL EXPENSES                6,468,698     6,379,114     2,789,101
                                      ----------    ----------    ----------
         INCOME FROM OPERATIONS          985,119       485,405       221,181
                                      ----------    ----------    ----------
OTHER INCOME (EXPENSE):
  Other income (expense) (Note I)         19,214      (266,575)       13,443
  Minority interest in income of
    consolidated subsidiary (Note I)     (11,192)      (38,243)
                                      ----------    ----------    ----------
         TOTAL OTHER INCOME (EXPENSE)     19,214      (277,767)      (24,800)
                                      ----------    ----------    ----------

Earnings before income taxes           1,004,333       207,638       196,381

Provisions for income taxes (Note F)     133,692        39,617       110,893
                                      ----------    ----------    ----------
NET EARNINGS                          $  870,641    $  168,021    $   85,488
                                      ==========    ==========    ==========




                        See Notes to Financial Statements


                                       3
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS  ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                        Year Ended April 30
                                          ---------------------------------------------
                                              1997             1996           1995
                                              ----             ----           ----
<S>                                       <C>             <C>             <C>          
ACCUMULATED DEFICIT, beginning of year    $(14,535,928)   $(14,703,949)   $(14,789,437)

NET EARNINGS                                   870,641         168,021          85,488
                                          ------------    ------------    ------------

ACCUMULATED DEFICIT, end of year          $(13,665,287)   $(14,535,928)   $(14,703,949)
                                          ============    ============    ============
EARNINGS PER SHARE:

  Net earnings per share (Note A)         $       0.05    $       0.01    $       0.01
                                          ============    ============    ============

                                                  Common Stock
                                          ----------------------------
                                            Number of                      Contributed
                                              Shares         Amount          Capital
                                          ------------    ------------    ------------
BALANCES:
  April 30, 1994                            13,728,879      18,567,561         220,872
  Shares issued:
     Acquisition of subsidiary               4,587,000       1,000,000
     Settlement of liabilities               1,210,495         442,294

BALANCES:
                                          ------------    ------------    ------------
  April 30, 1995                            19,526,374      20,009,855         220,872
  Shares issued:
     Settlement of liabilities                  36,607           4,500
     Shares reacquired and cancelled            (7,793)         (7,793)

BALANCES:
                                          ------------    ------------    ------------
  April 30, 1996                            19,555,188      20,006,562         220,872
  Shares issued:
             Acquisition of subsidiary         350,000          35,000

BALANCES:
                                          ============    ============    ============
  April 30, 1997                            19,905,188      20,041,562         220,872
                                          ============    ============    ============
</TABLE>

                        See Notes to Financial Statements

                                       4

<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                           Year Ended April 30
                                                 -----------------------------------
                                                    1997         1996          1995

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                              <C>          <C>          <C>      
  Net earnings                                   $ 870,641    $ 168,021    $  85,488
  Adjustments to reconcile net earnings
    to net cash used by
    operating activities:
       Depreciation and depletion                   36,946       39,116       27,681
       Minority interest                             2,674       11,192       13,494
       Allowance for doubtful accounts               5,000       25,000
       Amortization of goodwill                      3,977        3,977
       Deferred taxes                              167,411       39,600       29,725
       Acquisition of Goodwill                     (26,979)

CHANGES IN CURRENT ASSETS AND CURRENT
   LIABILITIES:  Net of effect from purchase
   of Twin-Chart, Inc.:

   (Increase) decrease in current assets:
       Accounts receivable                        (240,192)      49,237     (166,828)
       Inventory                                   (12,768)      22,756     (421,436)
       Prepaid expenses                             (1,697)      (2,436)      11,216

   (Increase) decrease in non-current
       assets:
       Deposits                                          0        2,931        4,574

   Increase (decrease) in current liabilities:
       Accounts payable and accrued expenses      (206,545)     (50,907)      87,100
       Income taxes payable                              0            0       (3,000)
                                                 ---------    ---------    ---------

NET CASH  PROVIDED (USED) BY OPERATING
        ACTIVITIES:                                598,468      308,487     (331,986)
                                                 ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Issuance of securities                           35,000
   Disposition of securities                        25,650
   Investment in securities                        (75,000)
   Purchase of property and equipment              (56,816)    (308,426)     (17,024)
   Disposition of equipment                         38,629
   Loss realized on sale of securities             287,850
   Purchase of minority interest in subsidiary    (167,750)
                                                 ---------    ---------    ---------

NET CASH (USED) BY INVESTING ACTIVITIES:           (21,816)    (124,047)     (92,024)
                                                 ---------    ---------    ---------
</TABLE>
                        See Notes to Financial Statements

                                       5
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

                                                     Year Ended April 30
                                             --------------------------------
                                                 1997       1996       1995
                                                 ----       ----       ----
CASH FLOWS FROM FINANCING ACTIVITIES:

 Amounts loaned on notes receivable                        (6,702)   (26,426)
 Amounts repaid on note receivable              25,595     40,612
 Amounts borrowed under notes payable                     640,179      8,969
 Amounts repaid on notes payable               (98,584)  (291,795)   (23,360)
 Repayment of subscriptions receivable
   through elimination of accounts payable
   and accrued expenses                              0        250    327,071
 Reacquisition of common stock (net)                 0     (3,293)
                                            ----------  ---------  ---------

NET CASH PROVIDED (USED) BY
 FINANCING ACTIVITIES:                         (72,989)   379,251    286,254
                                            ----------  ---------  ---------

NET INCREASE (DECREASE) IN CASH                503,663    563,691   (137,756)

CASH AND CASH EQUIVALENTS, beginning of year   614,356     50,665        229
CASH AND CASH EQUIVALENTS, acquired            188,192
                                            ----------  ---------  ---------

CASH AND CASH EQUIVALENTS, end of year      $1,118,019  $ 614,356  $  50,665
                                            ==========  =========  =========
SUPPLEMENTAL DISCLOSURE:

 Interest paid                              $   40,851  $  58,091  $  44,093

 Income taxes paid                                      $  46,016  $  94,082



                        See Notes to Financial Statements

                                       6
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES

                                                      Year Ended April 30
                                                ------------------------------
                                                 1997         1996        1995
                                                 ----         ----        ----
Payment of accounts payable and
 accrued expenses in exchange
 for common stock                                          $    250    $442,294

Write-down for unrealized loss on
 available for sale securities                 $205,500               ($287,850)

Purchase of minority interest in subsidiary               ($167,750)




                        See Notes to Financial Statements


                                       7
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Company was  organized in July 1968 for the purpose of acquiring oil and gas
leases and for the exploration and development of oil and gas properties.

On October 30, 1994, the Company acquired Twin-Chart, Inc. a Nevada Corporation,
and its subsidiary  (collectively  Twin).  Twin was privately owned and operated
and is a producer and distributor of transit temperature recording instruments.

Twin was acquired by the issuance of 4,587,000 restricted shares of common stock
and 5,000,000  warrants to purchase  restricted common stock of the Company with
an agreed aggregate value of approximately $1,050,000.

Twin conducts its operations  primarily  through a 100 percent owned  subsidiary
Transit Services, Inc., under the trade name and style of Cox Recorders.

In March, 1997 a transaction was consummated wherein the Company acquired 75% of
the issued and outstanding shares of National On-Site Check Cashing, Inc.

Mr.  Alfred P.  Sprenger  has been the  President,  one of two  directors  and a
shareholder  of the Company,  since  before  1970.  Mr. Roger Sherer who was the
Secretary-Treasurer,  one of two  directors  and a  shareholder  of the Company,
since before 1970,  passed away in 1997. His replacement,  as director,  has not
been elected.

Effective   August  1,  1995,  by  agreement,   the  Company   organization  was
restructured with Mr. James Cox becoming an officer and director of the Company.
Mr.  Sprenger  became the Chairman of the Board of Directors and Chief Executive
Officer,  Mr. Cox became  President and Chief  Operating  Officer.  Mr. Sprenger
remained on the Board.

Summary of Significant Accounting Principles

    a. Principles of consolidation

    The consolidated  financial  statements  include the accounts of the Company
    and its wholly owned  subsidiaries,  Energy Reserve Financial Corp.,  Energy
    Reserve  Holdings,  Inc., ERES Cogenics,  Inc. and Twin-Chart,  Inc. It also
    includes the 75%  acquisition of National  On-Site Check  Cashing,  Inc. All
    significant intercompany accounts and transactions have been eliminated.

    b. Accounting estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
    accepted  accounting  principles  requires  management to make estimates and
    assumptions  that affect the reported  amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements  and the reported  amounts of revenues  and  expenses  during the
    reporting period. Actual results could differ from those estimates.

    c. Capitalization of oil and gas properties

    The  following  types  of  costs  relating  to the  Company's  oil  and gas
    properties  are  capitalized   under  the  successful   efforts  method  of
    accounting:

                                       8
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Summary of Significant Accounting Principles (Continued)

    c. Capitalization of oil and gas properties (Continued)

        i. Costs of purchase to acquire properties.

        ii. Costs to obtain access to proved reserves and to provide  facilities
            for extracting,  treating, gathering and storing oil and gas whether
            or not a specific well is successful.

    d.  Depreciation,  depletion and amortization of capitalized cost of oil and
        gas properties

        Depreciation,  depletion and amortization of the capitalized cost of oil
        and  gas   properties   are   provided   (on  each   property)   on  the
        unit-of-production  method, at rates which are based on the ratio of oil
        and gas  produced  for the year to  independent  estimates  of the total
        proved developed  recoverable  reserves and to total proved  recoverable
        reserves from the property.  These rates are applied to the  unamortized
        costs for each property.  Adjustments to the rates applied,  required as
        the result of revisions of  independent  engineers'  estimates of proved
        reserves, affect the year of such change and future years.

        Depreciation  of all other  property  and  equipment  is provided on the
        straight-line  method over the respective  estimated  lives ranging from
        five to twenty years.

    e.  Operating costs

        Costs of oil production  (lifting  costs),  geological  and  geophysical
        costs and the costs of carrying and retaining undeveloped properties are
        charged to operations as incurred.

    f.  Research and development costs

        Costs of research and  development  activities are charged to operations
        as incurred.

    g.  Cash and cash equivalents

        Cash and cash equivalents represent highly liquid investments, generally
        with a remaining maturity of three months or less.

    h.  Inventory

        Inventory at April 30, 1997 and 1996 consists primarily of raw material,
        work-in-progress  and  finished  goods  related to  transit  temperature
        recording instruments; manufactured by Transit Services. Inventories are
        stated at the lower of cost (first-in, first-out method) or market.

    i.  Income taxes

        The Company  accounts  for income  taxes under  Statement  of  Financial
        Accounting  Standards No. 109,  "Accounting  for Income  Taxes".  Income
        taxes are provided based on earnings  reported for financial  statements
        purposes.  Deferred  taxes are  provided  on the  temporary  differences
        between income for financial statement and tax purposes.

                                       9
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Summary of Significant Accounting Principles (Continued)

    i.  Income taxes (Continued)

        The Company  deducts certain  exploration  and development  costs in its
        income tax returns,  which are  capitalized  and amortized for financial
        reporting  purposes.  Accordingly,  the  tax  basis  of  certain  of the
        Company's  oil and gas  assets  is less  than its  basis  for  financial
        reporting  purposes.  Deferred taxes for these differences have not been
        provided in the accompanying  consolidated  financial  statements due to
        the existence of net operating loss carry-forwards.

    j.  Concentration of credit risk

        Financial   instruments,   which  potentially  subject  the  Company  to
        concentrations  of credit risk,  consist  principally  of temporary cash
        investments and trade receivables. The Company places its temporary cash
        investments in two money market accounts (totaling $898,997 and $406,559
        at April 30, 1997 and 1996  respectively)  with a high quality financial
        institution. At April 30, 1997 and 1996, substantially all cash and cash
        equivalents   were  on   deposit   with   one   financial   institution.
        Concentrations  of credit  risk with  respect to trade  receivables  are
        limited due to the large number of customers  comprising  the  Company's
        customer  base and their  dispersion  across many  different  geographic
        areas.  Accounts receivable from approximately ten customers amounted to
        approximately 38% of the total accounts receivable at April 30, 1997 and
        1996.  Generally,  the  Company  does not  require  collateral  or other
        security to support  customer  receivables.  The Company  established an
        allowance for doubtful  accounts during the year ended April 30, 1996 in
        the amount of $25,000. At April 30, 1997 the allowance was $30,000.

    k.  Fair value of financial instruments

        Based on  borrowing  rates  currently  available to the Company for bank
        loans with similar terms and maturities, the fair value of the Company's
        long-term  debt  approximates  the  carrying  value.  Furthermore,   the
        carrying value of all other financial instruments potentially subject to
        valuation  risk  (principally  consisting of cash and cash  equivalents,
        accounts  receivable,   bank  borrowings,  and  accounts  payable)  also
        approximates fair value.

    l.  Issuance of common stock

        The  issuance  of common  stock for other than cash is  recorded  by the
        Company  at  management's  estimate  of the  fair  value  of the  assets
        acquired  or  services  rendered.   The  shares  of  common  stock  used
        (investment  shares) can be sold only in  accordance  with issued  rules
        promulgated by the Securities and Exchange Commission (SEC).

    m.  Goodwill

        Goodwill created in the acquisition of the consolidated  subsidiaries is
        being  amortized  over 15 years.  Accumulated  amortization  amounted to
        $3,977 and $7,954 at April 30, 1997 and 1996, respectively.

    n.  Net income per share

        The net income per common share is based on the weighted  average number
        of common shares outstanding during each year (1997 - 19,584,355; 1996 -
        19,540,781;  1995 -  16,619,877).  The exercise of  outstanding  options
        would have an antidilutive effect on earnings per share.

                                       10
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)

Summary of Significant Accounting Principles (Continued)

    o.  Long-lived assets

        The Company has implemented  the  requirements of Statement of Financial
        Accounting   Standards  No.  121,   Accounting  for  the  Impairment  of
        Long-lived  assets  and for  Long-Lived  asset for the  Disposal  of. In
        evaluating  the  recoverabilty  of  the  Company's   Long-lived  assets,
        management  evaluated the current fair market value and expected  future
        cash flows of its assets and  concluded  that no impairment of value has
        occurred as of April 30, 1997.

NOTE  B - INVENTORY

Inventory at April 30, 1997 and 1996 consists of the following:

                              1997        1996
                              ----        ----
          Raw Materials     $279,338   $250,437
          Work-in-process    142,413    116,461
          Finished goods     333,285    375,370
          Crude Oil            2,456      2,456
                            --------   --------
                            $757,492   $744,724
                            ========   ========

NOTE  C - INVESTMENT IN SECURITIES

Investments in real estate

In 1976, the Company acquired 45 undeveloped lots in California in consideration
for  47,500  investment  shares  of its  common  stock and the  reassignment  of
production  interests in certain West  Virginia  leases  valued by management at
$210,000.  Through 1991, due to changes in zoning regulations and other factors,
the Company had  provided  reserves  of $180,000 by charges to  operations.  The
Company's  investment  in the lots was reduced to $30,000,  net of the valuation
reserve.  In  March  1992,  as part of a  February  1992  agreement  to  acquire
securities  of Pan  American  Energy,  Inc.,  (PAEC) a public  corporation,  the
Company traded the California  lots in exchange for 4,000,000  Series "A" common
stock warrants and the right to purchase  2,000,000  additional such warrants at
ten cents ($.10) per warrant. The Company did not recognize gain on the exchange
and has recorded the cost of the  warrants at the $30,000  recorded  cost of the
lots.

Investments in securities

     Pan American Energy Corporation

In February 1992, the Company entered into an agreement with Pan American Energy
Corporation   (PAEC)  for  the   acquisition  of  certain   securities  of  that
corporation. As set forth earlier in these notes, the Company acquired 4,000,000
Series "A" common stock warrants of PAEC and the right to purchase an additional
2,000,000 such warrants which were recorded at a cost of $30,000.

Additionally, under the agreement with PAEC, the Company acquired 300,000 shares
of PAEC  common  stock in  exchange  for  225,000  restricted  shares  of Energy
Reserve,  Inc. common stock.  The exchange was consummated on the basis of $1.00
per share for Company  stock and $0.75 per share of PAEC  stock.  At the date of

                                       11
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE  C - INVESTMENT IN SECURITIES (CONTINUED)

Investments in securities

the  exchange  the  Company  stock was  traded at 1/4 to 5/8 and PAEC  stock was
traded at 1/4 to 1/2, both in the over-the-counter market.

In April 1993,  the Company  issued and exchanged  200,000  shares of its common
stock for 400,000  investment shares of Pan American Energy  Corporation  common
stock.  The  exchange  was valued at $1.00 for  Company  stock and $0.50 for Pan
American Energy Corporation stock.

At April 30,  1995,  the Pan  American  Energy  Corporation  stock was valued at
approximately  $0.10 per share.  The  Company  reduced all Pan  American  Energy
Corporation  shares to that value as of that date.  The loss on these  available
for sale securities was realized in 1996.

     O.T.S. Holdings, Inc.

In February  1992, the Company  entered into an agreement with O.T.S.  Holdings,
Inc. (OTS) a public  company to sell certain mining  equipment and 50,000 shares
of  Company  stock in  exchange  for  $10,000  cash and  190,000  shares  of 10%
Cumulative Convertible Income Preferred stock of OTS. The transaction was valued
at $200,000  comprised  of $50,000 for the Company  stock at $1.00 per share and
$150,000 for the mining equipment.

In conversations with a market-maker for these securities, it was concluded that
recent  litigation  has reduced the value of this stock to $.05 bid; $.09 asked.
Accordingly,  a valuation allowance was established reducing the carrying amount
to $.05 per share. Because the core business of the company was still considered
sound,  the loss is considered  unrealized  and  reflected in the  stockholders'
equity section of the financial statements.

     Perfection Foods International

In December  1992,  the Company  agreed in principal to use 50,000 shares of its
common stock to acquire 1,500,000 common stock shares and 5,000,000  warrants of
Perfection Foods,  International (PFI) a company formed in 1992 to engage in the
fish  processing  business.  In March 1993,  subsequent to the fiscal year ended
December 31, 1992,  the  transaction  was completed  and the Company  issued the
agreed  shares and received the PFI shares.  Mr.  Sprenger,  the chairman of the
Board of  Directors  of the  Company,  is an officer and director of PFI. At the
date of the transaction,  March 1993, the Company's  holding  represented 33% of
the outstanding shares of PFI, and the Company recorded the transaction of $1.00
per share issued on 50,000 shares. Because the short-term growth of PFI has been
slower than  anticipated,  the Company has reduced the carrying  amount of PFI's
shares by 50%. The Company still believes in the long-term growth of PFI and has
classified  the  unrealized  loss  in the  stockholders  equity  section  of the
financial statements.

Shares held at April 30, 1997 and 1996 were comprised as follows:

                                                          1997
                                             -----------------------------
                                                      Current   Unrealized
                                              Cost     Value       Loss
                                              ----     -----       ----
Pan American Energy Corporation Warrants    $30,000   $30,000    $
Perfection Food International Stock          50,000    25,000     25,000

                                       12
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE  C - INVESTMENT IN SECURITIES (CONTINUED)

Investments in securities (Continued)
                                                          1997
                                             -----------------------------
                                                      Current   Unrealized
                                              Cost     Value       Loss
                                              ----     -----       ----
O.T.S. Holdings, Inc. Stock                 190,000     9,500     180,500
                                           --------   -------    --------
                                           $270,000   $64,500    $205,500
                                           ========   =======    ========

                                                             1996
                                                     --------------------
                                                                  Current
                                                       Cost        Value
                                                       ----       -----
Pan American Energy Corporation Warrants             $ 30,000    $ 30,000
Perfection Food International Stock                    50,000      50,000
O.T.S. Holdings, Inc. Stock                           190,000     190,000
                                                     --------    --------
                                                     $270,000    $270,000
                                                     ========    ========

NOTE D - NOTES RECEIVABLE

Notes receivable at April 30, 1997 and 1996 consists of:

                                                        1997          1996
                                                        ----          ----
    Amount due from estate of subsidiaries
    former president plus accrued interest
    at 7%. Note due April 15, 1997.                  $     0        $15,381

    Note due from officer in monthly installments
    of $300, including interest at 8%. The note
    was paid in full after April 30, 1996.                 0         12,693

    Unsecured note receivable, due October 6, 1997
    plus accrued interest at 13%.                     23,183         20,000

    Unsecured note receivable, due on or before
    April 15, 1997 plus accrued interest at 8%.            0          8,000

    Other                                             16,396          9,100
                                                     -------        -------
                                                      39,579         65,174
    Less: current portion                             39,579         65,174
                                                     -------        -------
                                                     $     0        $     0
                                                     =======        =======

                                       13
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE E - PROPERTY AND EQUIPMENT

At April 30, 1997 and 1996,  property  and  equipment  are  summarized  by major
classification as follows:

Oil and Gas Properties and Equipment                   1997         1996
                                                       ----         ----

     Intangible drilling costs                      $  883,023   $  883,023
     Lease and well equipment                        1,828,881    1,828,881
     Leasehold improvements                            715,891      715,891
     Undeveloped leases                                 72,167       72,167
     Repurchased participating interests             2,608,640    2,608,640
     Other                                             121,418       67,127
                                                    ----------   ----------
                                                     6,230,020    6,175,729
     Less: accumulated depreciation and depletion    2,767,078    2,767,078
                                                    ----------   ----------
                                                     3,462,942    3,408,651
                                                    ----------   ----------

Manufacturing Property and Equipment                    1997        1996
                                                        ----        ----
     Tooling                                           112,727      110,202
     Machinery and equipment                            34,640       34,640
     Office furniture and equipment                      6,129        6,129
     Leasehold improvements                            232,918      232,918
                                                    ----------   ----------
                                                       386,414      383,889
     Less: accumulated depreciation and depletion      100,548       63,602
                                                    ----------   ----------
                                                       285,866      320,287
                                                    ----------   ----------
                                                    $3,748,808   $3,728,938
                                                    ==========   ==========
Oil and Gas Properties

     Mitchel leases

The Mitchel leases located in Kern County,  California  consist of 380 acres, on
which 52 oil wells have been drilled and completed.

During 1997,  1996 and 1995 the Company did not drill any wells on this lease as
to which all drilling requirements have been satisfied.

Landowner and overriding royalty interests in the property total 21.66 percent.

                                       14
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)

     Mitchel leases (Continued)

The Company has obtained a report from an independent  petroleum  engineer which
combines  the  estimated  proved  reserves  and revenues as of March 1990 of the
Mitchel leases and the  contiguous  Bacon Hills leases.  These  combined  leases
comprise an entire section of the Chico-Martinez  field (see below, "Bacon Hills
lease").  Reference is also made to the supplemental information on Standardized
measure of Discounted Future Net Cash Flows elsewhere in this Form 10-K.

During 1997, the Company produced approximately 500 gross barrels of oil, on the
combined Mitchel and Bacon Hills leases.  No oil was produced on these leases in
1996 and  1995.  During  1997,  1996  and  1995,  the  Company  had no  steaming
operations.

     Bacon Hills lease

This sublease, located in the Chico-Martinez field, Kern County, California, was
acquired in December 1980, and consists of approximately 260 acres, in which the
Company has interests to the depth of 5,000 feet.  The landowners and overriding
royalty  interest  holders are identical  with the Mitchel  leases,  which total
21.67 percent, and the Company owns the remaining 78.33 percent working interest
in this  lease.  The  acquisition  of this  sublease,  in  conjunction  with the
Mitchell subleases,  provided the Company with an entire leasehold interest in a
full section of land. Under the terms of this sublease, the Company committed to
the drilling of an initial six wells on or before  March 31, 1982,  and at least
six additional  wells each 12-month period  thereafter,  until at least 52 wells
have been drilled without regard to whether they are producing or abandoned. The
Company  has drilled a total of 14 wells - under its  Commitment.  No wells have
been drilled on this lease since 1984.

In March 1990,  the  sublessor  declared the sublease  terminated  and requested
return  of  the  undrilled  portion  of  the  sublease.  The  Company  does  not
acknowledge  the  declaration  of  termination,  and has not  complied  with the
sublessor's request. To date, no litigation,  action or further request has been
undertaken by the sublessor in connection with this matter. The Company believes
that this breach can be cured, but irrespective of the breach, the Company holds
a five acre well tract and the oil and gas rights to each of the  aforementioned
fourteen wells on this sublease.

     Cogeneration System and Thermally Enhanced Oil Recovery Operation

The major activity of the Company  concerning the properties during the past ten
years was directed toward the implementation of a proposed COGEN/TEOR Project to
be located on the Mitchel  leases,  with the  capability of serving the combined
Mitchel  and  Bacon  Hills  leases  with a steam  flood  enhanced  oil  recovery
operation and provide for the sale of power to a California Public Utility. ERES
Cogenics,  Inc., a wholly owned subsidiary,  was formed in August 1987 to be the
builder/owner/operator of the COGEN/TEOR facilities.  The Company signed a power
purchase  agreement  with the Pacific Gas and  Electric  Company  (PG&E) for the
delivery by the Company of 20.5 megawatts of electricity no earlier than June 1,
1989 and no later  than  December  1991.  The  agreement  further  provided  for
delivery  and the  purchase  of up to 45  megawatts  of power  in  later  years.
Contracts were signed or negotiated with  responsible and experienced  suppliers
and contractors for the Cogen construction,  engineering,  supervision,  natural
gas delivery,  maintenance and operation and the TEOR installation including the
laying of steam lines for the steam flood operations.  The estimated cost of the
20.5 megawatt  COGEN/TEOR  facility was between  $45,000,000  and $50,000,000 by
independent engineers.

The power purchase  agreement with PG&E  terminated on December 24, 1991 after a
decision by the utility not to defer the  deadline  date.  In 1992,  the Company
filed a complaint with the California Public Utility  Commission (CPUC) alleging
bad faith conduct by PG&E and requesting a reinstatement of a new power purchase

                                       15
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)

contract. In October 1993, the CPUC hearing on the complaint was concluded.  The
CPUC has not rendered a decision on the complaint as of the date of this report,
however in June,  1997,  the Company and PG&E reached a settlement  agreement of
the complaint, which settlement is subject to approval by the CPUC.

     Other matters

Geological  and  geophysical  costs for the years  ended April 30, 1997 and 1996
were not significant.

To  continue to operate and  further  develop  its oil and gas  properties,  the
Company will require significant amount of additional capital in 1997 and future
years from the sale of debt and/or equity securities, or through other financial
arrangements.

NOTE F - INCOME TAXES

The provisions for income taxes consists of:

                                                  April 30
                                     ----------------------------------
                                       1997        1996          1995
                                       ----        ----          ----
Current payable:
Federal - charge equivalent
 to provision for taxes on income                 $ 32,000     $  6,772
State                                $    800        1,017        5,023
                                     --------     --------     --------
                                          800       33,017       11,795
                                     --------     --------     --------
Deferred:
  Federal                              98,933       29,304       69,704
  State                                33,959       10,296       29,394
                                     --------     --------     --------
                                      132,892       39,600       99,098
                                     --------     --------     --------
                                      133,692       72,617      110,893
                                     --------     --------     --------
Less: utilization of net operating
loss carryforward                           0      (33,000)           0
                                     --------     --------     --------
                                     $133,692     $ 39,617     $110,893
                                     ========     ========     ========

The Company and its subsidiaries file  consolidated  Federal income tax returns.
There is an aggregate  Federal net  operating  loss  carryover of  approximately
$11,900,000  available to reduce  future  federal  taxable  income of the parent
company.  These net operating  loss  carryovers  will expire in various  amounts
between 2001 and 2010.

The Company also have available unused  investment tax credits of $184,000 which
will expire in various amounts between 1997 and 2001.

In 1997 and 1996 the minimum state taxes only were paid.

The  reconciliation  of income tax computed at U.S.  Federal and State statutory
rates to the income tax  provision  for the years  ended April 30, 1997 and 1996
are as follows:

                                       16
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE F - INCOME TAXES (CONTINUED)

                                                     1997
                              --------------------------------------------------
                                                  Currently Payable
                              --------------------------------------------------
                                 ERI      Twin-Chart  (ii)Consolidated  Deferred
                                 ---      ----------  ----------------  --------
Pre-tax accounting income     $ 282,725   $ 736,608     $1,019,333      $
Abandonment of property        (594,000)   (594,000)       594,000
                              ---------   ---------     ----------      --------
Taxable income                $ 282,725   $ 142,608     $  425,333      $594,000
                              =========   =========     ==========      ========

Tax at statutory rates:
   Federal                    $  98,900   $  49,900     $  148,800      $ 98,933
   State                            800       7,100          7,900        33,959
Utilization of net operating
     loss carry forward         (98,900)    (57,000)      (155,900)
                              ---------   ---------     ----------      --------

                              $     800   $       0     $      800      $132,892
                              =========   =========     ==========      ========

                                                     1996
                              --------------------------------------------------
                                                  Currently Payable
                              --------------------------------------------------
                                 ERI      Twin-Chart  (ii)Consolidated  Deferred
                                 ---      ----------  ----------------  --------

Pre-tax accounting income     $116,137     $91,501       $207,638        $
Abandonment of property                    (91,501)        91,501         91,501
                              --------     -------       --------        -------

Taxable income                $116,137           0       $116,137        $91,501
                              ========     =======       ========        =======
Tax at statutory rates:
       Federal                $            $             $ 33,000        $22,000
       State                                               10,000          7,617
Utilization of net
Operating loss carryforward                               (33,000)
                              --------     -------       --------        -------
                              $      0     $     0       $ 10,000        $29,617
                              ========     =======       ========        =======

Substantially  all of the  Company's  deferred  tax asset at April 30,  1996 was
attributable to property that has been written-off for financial accounting, but
not income tax purposes,  amounting to approximately  $600,000. The remainder of
that property was written off in 1997.

                                       17
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts  payable and accrued  liabilities at April 30, 1997 and 1996 consist of
the following:
                                                           1997            1996
                                                        --------        --------
Trade accounts payable                                  $211,961        $404,481
Accrued vacation payable                                  67,443          65,105
Accrued salaries and wages payable                       134,623         128,333
Other accounts payable and accrued
liabilities                                               75,713          98,366
                                                        --------        --------

                                                        $489,740        $696,285
                                                        ========        ========


NOTE H - NOTES AND CONTRACTS PAYABLE

The following is a summary of notes and contracts  payable at April 30, 1997 and
1996:

                                                          1997            1996
                                                          ----            ----
Unsecured notes payable to individuals due 
in monthly installments of $2,955, including 
interest at 8%, through December 2001
(see Note I)                                            $103,875        $137,736

Note payable secured by equipment, payable in 
monthly installments of $462, including interest 
at approximately 12.7%                                         0           7,353

Stipulated judgement for settlement of litigation 
and dispute involving Company's co-generation project          0         112,855

Stipulated judgement for $201,875 for settlement of 
litigation involving a well drilling contractor at 
the Company's Mitchell and Bacon Hills lease 
Interest at accruing 10% per annum                       358,429         326,097


Note payable to individual at 10%, due on demand           7,057           7,057

Judgement of $68,852 for prior years accrued rentals           0          32,645

                                       18
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)

Note payable to individual due in monthly installments
of $3,500, including interest at 9%.                           0           6,353

Unsecured notes payable to individuals, due on demand,
including interest at 8%.                                125,000               0

Unsecured note payable at 10%, due on demand.              4,500           4,500

Note payable to bank, secured under general security
agreement, due in monthly installments of $7,560,
including interest at 8.5%, through January 2002.        345,684         408,533
                                                        --------      ----------

TOTAL                                                    944,545       1,043,129
Less: current portion                                    585,859         577,234
                                                        --------      ----------
                                                        $358,686      $  465,895
                                                        ========      ==========

Aggregate maturities of long-term borrowings over the next five fiscal years are
as follows:

   Year ended April 30                Amount
   -------------------                ------
          1998                       $585,859
          1999                       $ 98,584
          2000                       $102,464
          2001                       $101,236
          2002                       $ 56,402

NOTE I - ACQUISITION OF TWIN-CHART, INC.

In April 1993,  the Company  exchanged  50,000  shares of its common stock for a
combination of 1,000,000  shares and 5,000,000  warrants of  Twin-Chart,  Inc.'s
(TCI) common  stock,  which  represented  approximately  20% of the  outstanding
shares.  In  October  1994,  the  Company  acquired  the  remaining  issued  and
outstanding  shares of TCI which  amounted  to  4,098,000  shares for  4,587,000
shares of the Company's common stock and 5,000,000  warrants for the purchase of
the Company's stock at an initial price of $5.00 per share.  The price per share
increases  at a rate of $.50 per share  per year for five  years  following  the
initial  year,  then at a rate of $1.00 per share per year for the  second  five
years and finally at a rate of $2.00 per share per year for the final three year
period.  The  acquisition  has been accounted for as a purchase.  The results of
operations of TCI have been included in the accompanying  consolidated financial
statements since the date of acquisition,  which was October 31, 1994. The total
cost of the acquisition was  approximately  $1,050,000,  which  approximated the
fair value of the net assets of TCI acquired as of that date.

In January,  1996,  TCI  acquired all of the  minority  interest  (13.7%) in its
subsidiary Transit Services,  Inc. The purchase price was $110 per share on five
year  installment  notes,  due in  monthly  installments  of  $2,955,  including
interest at 8% (see Note H). The total cost was $167,750.

                                       19
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

NOTE  I - ACQUISITION OF TWIN-CHART, INC. (Continued)

The separate financial statements of TCI are as follows:

                                                April 30
                                        -----------------------
                                            1997         1996
                                            ----         ----
Cash                                    $1,020,550   $  614,458
Accounts receivable                      1,032,161      883,671
Inventories                                755,036      742,268
Notes receivable-current                    39,579       63,309
Prepaid expenses                             5,918        4,222
                                        ----------   ----------
                                         2,853,244    2,307,928

Property and equipment (Net)               285,866      320,287
Deferred income taxes                            0      167,411
Deposits                                     3,097        3,097
                                        ----------   ----------
                                        $3,142,207   $2,798,723
                                        ==========   ==========

Accounts payable and accrued expenses   $  228,340   $  477,494
Income taxes payable                           400          400
Current portion of long-term debt           90,873       94,080
Due to a related party                   1,301,661      456,000
                                        ----------   ----------
                                         1,621,274    1,027,974

Long-term debt                             358,686      465,895
                                        ----------   ----------
                                         1,979,960    1,493,869
                                        ----------   ----------
Common stock                               986,987      986,987
Retained earnings                          175,260      317,867
                                        ----------   ----------
                                         1,162,247    1,304,854
                                        ----------   ----------
                                        $3,142,207   $2,798,723
                                        ==========   ==========

                        See Notes to Financial Statements

                                       20
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

NOTE I - ACQUISITION OF TWIN-CHART, INC. (Continued)

                   STATEMENTS OF INCOME AND RETAINED EARNINGS
                               YEAR ENDED APRIL 30

                                              1997          1996           1995
                                              ----          ----           ----
Revenue:
  Sales                                   $7,444,170    $6,864,519   $6,110,557

Costs and Expenses:
  Cost of sales                            3,472,256     3,525,156    3,218,037
  General and administrative expense       2,862,982     2,129,386    1,648,589
  Sales expense                            1,052,164     1,004,953    1,010,045
  Interest expense                            40,851        42,028       27,146
  Depreciation                                36,946        39,116       50,242
                                          ----------    ----------   ----------

  Total costs and expenses                 7,465,199     6,740,639    5,954,059

INCOME (LOSS) FROM OPERATIONS                (21,029)      123,880      156,498

Other income (expense):
 Minority interest in income (loss) of
   consolidated subsidiary                         0       (11,192)      (8,736)
 Other                                      (121,578)      (21,188)
                                          ----------    ----------   ----------

Earnings (loss) before income taxes         (142,607)       91,500      147,762

 Provision for taxes                               0        39,617       40,276
                                          ----------    ----------   ----------

      Net Earnings (loss)                   (142,607)       51,883      107,486

 Retained Earnings, beginning of year        317,867       265,984      158,498
                                          ----------    ----------   ----------

 Retained Earnings, (deficit) end of year $  175,260    $  317,867   $  265,984
                                          ==========    ==========   ==========

                        See Notes to Financial Statements

                                       21
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

NOTE  I - ACQUISITION OF TWIN-CHART, INC. (Continued)

                            STATEMENTS OF CASH FLOWS
                               YEAR ENDED APRIL 30
<TABLE>
<CAPTION>
                                                       1997          1996         1995
                                                       ----          ----         ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                <C>            <C>          <C>      
  Net earnings (loss)                              $ (142,607)   $  51,883    $ 107,486
  Adjustments to reconcile net earnings
  (loss) to net cash (used) provided
  by operating activities:
   Depreciation                                        36,946       39,116       50,242
   Minority interest                                        0       11,192        8,736

CHANGES IN CURRENT ASSETS AND
 CURRENT LIABILITIES:
  (Increase) decrease in current assets:
     Accounts receivable                             (145,803)      87,247     (205,321)
     Inventories                                      (12,768)      22,756     (119,782)
     Prepaid expenses                                  (3,355)      (1,140)      47,915
  (Increase) decrease in non-current assets:
     Deferred taxes                                   167,411       39,601       29,724
     Deposits                                               0            0        5,363
  Increase (decrease) in current liabilities:
     Accounts payable and accrued expense            (249,154)     (40,029)     229,064
     Income taxes payable                                   0            0       (3,000)
     Due to a related entity                          847,319      456,000            0
                                                   ----------    ---------    ---------

NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES      497,989      666,626      150,427
                                                   ----------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of minority interest (Note H)                    0     (167,750)           0
  Purchase of property and equipment                   (2,525)    (308,634)     (32,734)
  Abandonment of property and equipment                     0       38,837            0
                                                   ----------    ---------    ---------

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES       (2,525)    (437,547)     (32,734)
                                                   ----------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Amounts repaid on notes receivable                   21,044       40,612            0
  Amounts loaned on notes receivable                        0       (4,838)     (27,188)
  Amounts borrowed on notes payable                         0      592,750       33,146
  Amounts repaid on notes payable                    (110,416)    (291,794)     (97,554)
                                                   ----------    ---------    ---------

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES      (89,372)     336,730      (91,596)
                                                   ----------    ---------    ---------

NET INCREASE (DECREASE) IN CASH                       406,092      565,809       26,097
CASH, beginning of year                               614,458       48,649       82,108
                                                   ----------    ---------    ---------

CASH, end of year                                  $1,020,550    $ 614,458    $ 108,205
                                                   ==========    =========    =========
</TABLE>
                        See Notes to Financial Statements

                                       22
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE J - AQUISITON OF NATIONAL ON-SITE CHECK CASHING, INC. OF NEVADA

In March,  1997,  the Company  issued 350,000 shares of common stock in exchange
for 75% of the issued and outstanding  stock of "National On-Site Check Cashing,
Inc.  of Nevada"  (NOCC).  NOCC  cashes  payroll  checks for a fee using  mobile
armored  trucks for  facilitating  the  transactions.  The Company  recorded the
transaction using the purchase method of accounting and valued the shares issued
at $.10 per share.

NOTE K - COMMON STOCK

Shares issued in exchange for interest-bearing notes

The  Company  has  issued  shares  of its  common  stock in  exchange  for notes
receivable. The financial statements show the outstanding shares and the related
notes receivable as an offset against stockholders' equity.

NOTE L - RELATED-PARTY MATTERS

As discussed  below,  certain  transactions  have been  consummated with parties
related to the Company and its management.

Ownership interests

As discussed in Note A, Mr.  Sprenger,  the Chairman of the Board,  and Mr. Cox,
the President constitute the management and are the only members of the Board of
Directors of the Company.  Mr. Sprenger is the trustee of two liquidating trusts
for  two  formerly  affiliated  corporations  in  which  he was an  officer  and
director.  These trusts,  Progressive Investment  Corporation  Liquidating Trust
(PICLT) and PIC  Research  and  Development  Liquidating  Trust  (PICR&DLT)  are
shareholders of Company common stock.

The ownership of the Company's  common stock by Mr.  Sprenger,  Mr. Cox,  PICLT,
PICR&DLT,  Company employees and other related parties  (relatives,  friends and
business associates of Mr. Sprenger) is summarized as follows at April 30, 1997:

                                  Percentage
                                  ----------
     Mr. Sprenger *                  4.5
     Mr. Cox                        23.3
     PICLT                           1.9
     PICR&DLT                        1.2
     Company employees               2.5
     Other related parties *         24.3

* Includes stock issued under  subscription  rights (Refer to discussion in this
Note L).

Mr.  Sprenger,  Mr.  Sherer's Estate and other related parties own the following
beneficial percentages in the two liquidating trusts at April 30, 1997.

                                   PICLT    PICR&DLT
                                   -----    --------
      Mr. Sprenger                    0         0
      Mr. Sherer (Estate)           7.0       1.1
      PICLT                            -     44.1
      Other related parties         31.0      6.0

                                       23
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE L - RELATED-PARTY MATTER (CONTINUED)

Transactions involving Mr. Sprenger and other related parties

     A.   In  October  1984,  the  Company  and the then  President,  Alfred  P.
          Sprenger,  and his wife Dorothy V. Sprenger (Sprengers),  entered into
          an agreement  (the  agreement)  for the  issuance to the  Sprengers of
          2,000,000  investment  shares of Company stock at a price of $1.00 per
          share.  The price  quoted by  NASDAQ as of the date of  agreement  was
          $.875 to $1.00 per share.  The  agreement  was  mutually  extended  to
          December 31, 1991 for payment of the $2,000,000  which  evidenced by a
          promissory note secured by the issued shares.

          In December 1991, the Company  reviewed the status of the  arrangement
          with  issuances for employee  options and  settlement of  liabilities.
          Accordingly, the stock price for this agreement was adjusted to $0.625
          per share.  This  action  resulted  in a decrease  of  $750,000 in the
          amount of the original agreement.  The maturity date of the promissory
          note has been extended to December 31, 2000.

          In December 1992, Mr.  Sprenger  assigned his interest in 1,950,000 of
          those investment  shares to a non profit  organization.  From December
          1991 to April 30, 1995,  a total of $728,321 has been  credited to the
          common stock  promissory  note by  application  of $598,000 in accrued
          salary  compensation  from  1988 to date and a  $130,321  debt due Mr.
          Sprenger.  At April  30,  1997 and 1996,  the  unpaid  balance  of the
          promissory  note is  $521,929  and  $521,679,  respectively,  which is
          secured by 1) 870,800 shares of the issued common stock and 2) further
          collateralized by mortgages on real estate. At April 30, 1997, a total
          of 1,079,200  shares of the 1,950,000 shares of Company stock assigned
          by Mr. Sprenger had been transferred to the non profit organization.

     B.   In December 1985, the Company issued  1,300,000  investment  shares of
          common  stock to certain  parties in  exchange  for  promissory  notes
          secured  by the  issued  shares at a price of $0.625  per  share.  The
          quoted market price according to the National Market  Quotation Bureau
          was $0.62 to $0.875 per share at the date of  issuance  of the shares.
          The aggregate  dollar amount of the promissory  notes was $812,500.  A
          total of $458,779 has been paid on the promissory notes to date by the
          various  parties.  The  $353,721  balance  due at  April  30,  1997 is
          reflected  in the  consolidated  Balance  Sheet  as a  deduction  from
          shareholders'  equity.  This  balance due is secured by 508,394 of the
          issued  shares.  None of the  promissory  notes are due from officers,
          directors or employees of the company.

NOTE  M - COMMITMENTS AND CONTINGENCIES

General

The Company's  operations  are subject to various  governmental  and  regulatory
controls  (particularly  those of the Department of Energy and the Environmental
Protection  Agency),  the effect of which on the nature of the Company's  future
operations, if any, is not known.

Commitments

     A.   The  Company  leases its offices and  manufacturing  plant  facilities
          under noncancellable  operating leases which expire in 2005. The total
          minimum commitments under these leases are as follows:

                                       24
<PAGE>

ENERGY RESERVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1996
--------------------------------------------------------------------------------

NOTE M - COMMITMENTS AND CONTINGENCIES (Continued)

             Year ending April 30

                   1998          $ 67,642
                   1999          $ 67,642
                   2000          $ 67,642
                   2001          $ 67,642
           Through 2005          $248,043

          Rent  expense  for the years ended  April 30,  1997,  1996 and 1995 is
          $134,852, $125,380 and $71,332, respectively.

     B.   Two  Executive  Officers  of  the  Company's  Transit  Services,  Inc.
          subsidiary company have employment agreements which extend to December
          1, 1997. The  agreements may be terminated  upon mutual consent by the
          Company and the employee by the execution of an agreement  against the
          employee  taking  employment  with any existing  company or firm which
          conducts  business  in  the  sale  or  lease  of  temperature  records
          equipment.  In the event of termination by the Company  without cause,
          the Company  would be required to pay the  Officers  their  respective
          salaries  for  the  term  of the  agreement,  which  would  amount  to
          approximately  $115,000 and $53,000,  respectively,  on an  annualized
          basis.

Litigation

     A.   In March 1992,  the  Company  filed a  complaint  with the  California
          Public  Utilities  Commission  (CPUC)  against  Pacific Gas & Electric
          Company for bad faith in certain matters pertaining to the termination
          of  a  Power  Purchase  Agreement  between  the  parties  and  seeking
          continuation of the Agreement. The complaint was heard in October 1993
          by the CPUC. No decision has been entered by the CPUC as of this date,
          however,  in June,  1997,  the Company and PG&E  reached a  settlement
          agreement of the complaint, which settlement is subject to approval by
          the CPUL.

     B.   In October 1995, a complaint for  infringement  of patent was filed in
          the  United  States  District  Court  for  the  Eastern   District  of
          California.  Management  is of the opinion that they would  prevail at
          trial on this matter,  however, a settlement may be reached prior to a
          trial date.

Although the ultimate  outcome of these suits cannot be ascertained at this time
and liabilities of indeterminate  amounts may be imposed upon the Company, it is
the opinion of management,  based on information  currently available,  that the
allegations are without merit and that the resolution of this suit will not have
a material adverse effect on the  consolidated  financial  position,  results of
operations or cash flows of the Company.

                                       25