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                                                                   EXHIBIT 10.43

 
                     NON-QUALIFIED STOCK OPTION AGREEMENT


     THIS AGREEMENT, dated October 1, 1998 is made by and between KFx Inc., a
Delaware corporation hereinafter referred to as "Company," and Seth L. Patterson
hereinafter referred to as "Optionee":

     WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.001 par value Common Stock; and

     WHEREAS, the Company has determined that it would be to the advantage and
best interest of the Company to grant the Non-Qualified Option provided for
herein to the Optionee as a consideration for certain services provided by
Optionee to the Company;

     NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:

                                   ARTICLE I

                                  DEFINITIONS

     Section 1.01.  General.  Whenever the following terms are used in this
Agreement, they shall have the meaning specified below unless the context
clearly indicates to the contrary.  The masculine pronoun shall include the
feminine and neuter, and the singular the plural, where the context so
indicates.

     "Board" shall mean the Board of Directors of the Company.

     "Bylaws" shall mean the Amended and Restated Bylaws of the Company, as
amended from time to time.

     "Code" shall mean the Internal Revenue Code of 1986, as amended.

     "Commission" shall mean the Securities and Exchange Commission.

     "Company Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one (1) of the other corporations in such chain.  "Company Subsidiary" shall
also mean any partnership in which the Company and/or any Company Subsidiary
owns more than 50 percent of the capital or profits interests.

     "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.


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     "Option" shall mean the Non-Qualified Option to purchase Common Stock of
the Company granted under this Agreement.

     "Registrable Shares" means (i) the shares of Common Stock issued or
issuable upon exercise of the Option (but only if the Option is currently
exercisable) and (ii) any other shares of Common Stock issued in respect of such
shares (because of stock splits, stock dividends, reclassifications,
recapitalizations or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
sale pursuant to a Registration Statement or Rule 144 under the Securities Act.

     "Registration Statement" means a registration statement filed by the
Company with the Securities and Exchange Commission for a public offering and
sale of Common Stock (other than a registration statement on Form S-8 or Form S-
4, or their successors, or any other form for a similar limited purpose, or any
registration statement coveting only securities proposed to be issued in
exchange for securities or assets of another corporation).

     "Secretary" shall mean the Secretary of the Company.

     "Securities Act" shall mean the Securities Act of 1933, as amended.


                                   ARTICLE II

                                GRANT OF OPTION

     Section 2.01.  Grant of Option.  In consideration of the Optionee's
agreement as provided in Section 2.03, and for other good and valuable
consideration and on the date hereof the Company irrevocably grants to the
Optionee the option to purchase any part or all of an aggregate of Two Hundred
Fifty Thousand (250,000) shares of its $.001 par value Common Stock (the "Option
Shares") upon the terms and conditions set forth in this Agreement.

     Section 2.02.  Purchase Price.  The purchase price of each share of stock
covered by the Option shall be equal to $3.75 (the "Exercise Price"), without
commission or other charge.

     Section 2.03.  Consideration to Company.  The grant of this Option by the
Company to Optionee is in consideration for the Optionee accepting employment as
an officer of the Company.

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                                  ARTICLE III

                           VESTING AND EXERCISABILITY

     Section 3.01.  Commencement of Exercisability.  The Optionee may exercise
the Option to purchase some or all of the Option Shares as follows:
 
        (a) For purposes of this Agreement, the Option Shares shall be deemed
     "Nonvested Shares" unless they have become "Vested Shares" pursuant to the
     following provisions. The Option Shares shall become Vested Shares as
     follows:

            (i) On October 1, 1999, 20% of the Option Shares reserved for
        issuance under the Option shall become Vested Shares without further
        action by the Board.

            (ii) On October 1, 2000, October 1, 2001 and October 1, 2002, an
        additional 20% of the Option Shares reserved for issuance under the
        Option shall become Vested Shares without further action by the Board.
        
            (iii) On October 1, 2003, the remaining 20% of the Option Shares
        reserved for issuance under the Option shall become Vested Shares
        without further action by the Board.
        
        (b) Subject to the relevant provisions and limitations contained herein,
     the Optionee may exercise the Option to purchase some or all of the Vested
     Shares at any time after the vesting thereof. In no event shall the
     Optionee be entitled to exercise the Option for Nonvested Shares or for a
     fraction of a Vested Share.

        (c) The unexercised portion of the Option, if any, will automatically
     and without notice terminate and become null and void at 5:00 p.m., Denver,
     Colorado time on October 1, 2005. If, however, the Optionee's employment
     with the Company or any subsidiary of the Company terminates before such
     termination date, this Option will terminate on the applicable date as
     described in Section 3.02.

     Section 3.02.  Duration of Exercisability.  The Option, or any portion
thereof, shall remain exercisable until it becomes unexercisable under Section
3.03.

     Section 3.03.  Expiration of Option.  The Option may not be exercised to
any extent by the Optionee after the first to occur of the following events:
 
        (a) The expiration of seven (7) years from the date the Option was
     granted; or

        (b) The expiration of one (1) year from the date of the Optionee's
     death; provided, however, the Company may extend the expiration date of any
     such Option to accommodate such exercise; or

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          (c) The effective date of either the merger or consolidation of the
     Company with or into another corporation, or the acquisition by another
     corporation or person of all or substantially all of the Company's assets
     or eighty percent (80%) or more of the Company's then outstanding voting
     stock, or the liquidation or dissolution of the Company, unless the Company
     waives this provision or accelerates the exercise of the Options pursuant
     to Section 3.04 in connection with such transaction.  At least ten (10)
     days prior to the effective date of such merger, consolidation,
     acquisition, liquidation or dissolution, the Company shall give the
     Optionee notice of such event if the Option has then neither been fully
     exercised nor become unexercisable under this Section 3.03.

     Section 3.04.  Acceleration of Exercisability.  In the event of the merger
or consolidation of the Company with or into another corporation, or the
acquisition by another corporation or thereon of all or substantially all of the
Company's assets or eighty percent (80%) or more of the Company's then
outstanding voting stock, or the liquidation or dissolution of the Company, the
Company shall, upon such terms and conditions as it deems appropriate, provide
by resolution, adopted prior to such event and incorporated in the notice
referred to in Section 3.03(e), that at some time prior to the effective date of
such event this Option shall be exercisable as to all the shares covered hereby,
notwithstanding that this Option may not yet have become fully exercisable under
Section 3.01(a); provided, however, that this acceleration of exercisability
shall not take place if:

          (a) This Option becomes unexercisable under Section 3.03 prior to said
     effective date; or

          (b) In connection with such an event, provision is made for an
     assumption of this Option or a substitution therefor of a new option by a
     parent or subsidiary of such corporation; and

provided, further, that nothing in the Section 3.04 shall make this Option
exercisable if it is otherwise unexercisable by reason of Section 4.04.

     The Company may make such determinations and adopt such rules and
conditions as it, in its absolute discretion, deems appropriate in connection
with such acceleration of exercisability, including, but not by way of
limitation, provisions to ensure that any such acceleration and resulting
exercise shall be conditioned upon the consummation of the contemplated
corporate transaction.


                                   ARTICLE IV

                               EXERCISE OF OPTION

     Section 4.01.  Person Eligible to Exercise.  During the lifetime of the
Optionee, only the Optionee may exercise the Option or any portion thereof.
After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable 

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under Section 3.03, be exercised by his personal representative or by any person
empowered to do so under the Optionee's will or under the then applicable laws
of descent and distribution.

     Section 4.02.  Partial Exercise.  Any exercisable portion of the Option or
the entire Option, if then wholly exercisable, may be exercised in whole or in
part at any time prior to the time when the Option or portion thereof becomes
unexercisable under Section 3.03; provided, however, that each partial exercise
shall be for not less than one hundred (100) shares and shall be for whole
shares only.

     Section 4.03.  Manner of Exercise.  The Option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or his office of
all of the following prior to the time when the Option or such portion becomes
unexercisable under Section 3.03:
 
          (a)  Notice in writing signed by the Optionee or the other person then
entitled to   exercise the Option or portion, stating that the Option or portion
is thereby exercised, such   notice complying with all applicable rules
established by the Company; and

          (b) Full payment to the Secretary (in cash or by check) for the shares
     with respect to which such Option or portion is exercised;

          (c) A bona fide written representation and agreement, in a form
     satisfactory to the Company, signed by the Optionee or other person then
     entitled to exercise such Option or portion, stating that the shares of
     stock are being acquired for his own account, for investment and without
     any present intention of distributing or reselling said shares or any of
     them except as may be permitted under the Securities Act and then
     applicable rules and regulations thereunder, and that the Optionee or other
     person then entitled to exercise such Option or portion will indemnify the
     Company against and hold it free and harmless from any loss, damage,
     reasonable expense or liability resulting to the Company if any sale or
     distribution of the shares by such person is contrary to the representation
     and agreement referred to above.  The Company may, in its absolute
     discretion, take whatever additional actions it deems appropriate to insure
     the observance and performance of such representation and agreement and to
     effect compliance with the Securities Act and any other federal or state
     securities laws or regulations.  Without limiting the generality of the
     foregoing, the Company may require an opinion of counsel acceptable to it
     to the effect that any subsequent transfer of shares acquired on an Option
     exercise does not violate the Securities Act, and may issue stop-transfer
     orders covering such shares.  Share certificates evidencing stock issued on
     exercise of this Option shall bear an appropriate legend referring to the
     provisions of this subsection (c) and the agreements herein.  The written
     representation and agreement referred to in the first sentence of this
     subsection (c) shall, however, not be required if the shares to be issued
     pursuant to such exercise have been registered under the Securities Act,
     and such registration is then effective in respect of such shares; and

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          (d) Full payment to the Company (or other employer corporation) of all
     amounts which, under federal, state or local tax law, it is required to
     withhold upon exercise of the Option; and

          (e) In the event the Option or portion shall be exercised pursuant to
     Section 4.01 by any person or persons other than the Optionee, appropriate
     proof of the right of such person or persons to exercise the Option.

     Section 4.04.  Conditions to Issuance of Stock Certificates.  The shares of
stock deliverable upon the exercise of the Option, or any portion thereof, may
be either previously authorized but unissued shares or issued shares which have
then been reacquired by the Company.  Such shares shall be fully paid and
nonassessable.  The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise of
the Option or portion thereof prior to fulfillment of all of the following
conditions:
 
          (a)  The admission of such shares to listing on all stock exchanges on
     which such class of stock is then listed; and

          (b) The completion of any registration or other qualification of such
     shares under any state or federal law or under rulings or regulations of
     the Securities and Exchange Commission or of any other governmental
     regulatory body, which the Company shall, in its absolute discretion, deem
     necessary or advisable; and

          (c) The obtaining of any approval or other clearance from any state or
     federal governmental agency which the Company shall, in its absolute
     discretion, determine to be necessary or advisable; and

          (d) The payment to the Company (or other employer corporation) of all
     amounts which, under federal, state or local tax law, it is required to
     withhold upon exercise of the Option; and

          (e) The lapse of such reasonable period of time following the exercise
     of the Option as the Company may from time to time establish for reasons of
     administrative convenience.

     Section 4.05.  Rights as Stockholder.  The holder of the Option shall not
be, nor have any of the rights or privileges of, a stockholder of the Company in
respect of any shares purchasable upon the exercise of any part of the Option
unless and until certificates representing such shares shall have been issued by
the Company to such holder.

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                                   ARTICLE V

                            INCIDENTAL REGISTRATION

     Section 5.01.  Whenever the Company proposes to file a Registration
Statement at any time and from time to time, it will, prior to such filing give
written notice to the Optionee of its intention to do so and, upon the written
request of the Optionee given within twenty (20) days after the Company provides
such notice (which request shall state the intended method of disposition of the
Registrable Shares), the Company shall use its best efforts to cause all
Registrable Shares which the Company has been requested by the Optionee to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of the Optionee, provided that the
Company shall have the right to postpone or withdraw any registration effected
pursuant to this Section 5 without obligation to the Optionee.

     Section 5.02.  In connection with any registration under this Section 5
involving an underwriting the Company shall not be required to include any
Registrable Shares in such registration unless the Optionee accepts the terms of
the underwriting as agreed upon between the Company and the underwriters
selected by it.  If in the opinion of the managing underwriter it is appropriate
because of marketing factors to limit the number of Registrable Shares to be
included in the offering, then the Company shall be required to include in the
registration only that number of Registrable Shares, if any, which the managing
underwriter believes should be included therein.


                                   ARTICLE VI

                            REGISTRATION PROCEDURES

     Section 6.01.    Registration Procedures.  If and whenever the Company is
required by the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Company shall:

          (a) file with the Commission a Registration Statement with respect to
     such Registrable Shares and use its best efforts to cause that Registration
     Statement to become and remain effective;

          (b) as expeditiously as possible prepare and file with the Commission
     any amendments and supplements to the Registration Statement and the
     prospectus included in the Registration Statement as may be necessary to
     keep the Registration Statement effective, in the case of a firm commitment
     underwritten public offering, until each underwriter has completed the
     distribution of all securities purchased by it and, in the case of any
     other offering, until the earlier of the sale of all Registrable Shares
     covered thereby or 120 days after the effective date thereof;

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          (c) as expeditiously as possible furnish to the Optionee of such
     reasonable numbers of copies of the prospectus, including a preliminary
     prospectus, in conformity with the requirements of the Securities Act, and
     such other documents as the Optionee may reasonably request in order to
     facilitate the public sale or other disposition of the Registrable Shares;
     and

          (d) as expeditiously as possible use its best efforts to register or
     qualify the Registrable Shares covered by the Registration Statement under
     the securities or Blue Sky laws of such states as the Optionee shall
     reasonably request, and do any and all other acts and things that may be
     necessary or desirable to enable the Optionee to consummate the public sale
     or other disposition in such states of the Registrable Shares; provided,
     however, that the Company shall not be required in connection with this
     paragraph (d) to qualify as a foreign corporation or execute a general
     consent to service of process in any jurisdiction.

     If the Company has delivered preliminary or final prospectuses to the
Optionee and after having done so the prospectus is amended to comply with the
requirements of the Securities Act, the Company shall promptly notify the
Optionee and, if requested, the Optionee shall immediately cease making offers
of Registrable Shares and return all prospectuses to the Company.  The Company
shall promptly provide the Optionee with revised prospectuses and, following
receipt of the revised prospectuses, the Optionee shall be free to resume making
offers of the Registrable Shares.


                                  ARTICLE VII

                             ALLOCATION OF EXPENSES

     Section 7.01.  Allocation of Expenses.  The Company will pay all
Registration Expenses of all registrations under this Agreement; provided,
however, that if a registration under Section 6.01 is withdrawn at the request
of the Optionee (other than as a result of information concerning the business
or financial condition of the Company which is made known to the Optionee after
the date on which such registration was requested) the Optionee shall pay the
Registration Expenses of such registration.  For purposes of this Section 7, the
term "Registration Expenses" shall mean all expenses incurred by the Company in
complying with this Agreement, including, without limitation, all registration
and filing fees, exchange listing fees, printing expenses, fees and expenses of
counsel for the Company and the fees and expenses of one counsel selected by the
Optionee, state Blue Sky fees and expenses (and the expense of any special
audits incident to or required by any such registration), but excluding
underwriting discounts and selling commissions.

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                                  ARTICLE VIII

                                OTHER PROVISIONS

     Section 8.01.  Option Not Transferable.  Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 8.01 shall not prevent transfers by will or by the
applicable laws of descent and distribution.

     Section 8.02.  Shares to Be Reserved.  The Company shall at all times
during the term of the Option reserve and keep available such number of shares
of stock as will be sufficient to satisfy the requirements of this Agreement.

     Section 8.03.  Notices.  Any notice to be given under the terms of this
Agreement to the Company shall be addressed to the Company in care of its
Secretary, and any notice to be given to the Optionee shall be addressed to him
at the address given beneath his signature hereto.  By a notice given pursuant
to this Section 8.03, either party may hereafter designate a different address
for notices to be given to him.  Any notice which is required to be given to the
Optionee shall, if the Optionee is then deceased, be given to the Optionee's
personal representative if such representative has previously informed the
Company of his status and address by written notice under this Section 8.03.
Any notice shall be deemed duly given when enclosed in a properly sealed
envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in
a post office or branch post office regularly maintained by the United States
Postal Service.

     Section 8.04.  Titles.  Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this
Agreement.

     Section 8.05.  Construction.  This Agreement shall be administered,
interpreted and enforced under the laws of the State of Delaware.

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     IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.

                              KFx Inc.


                              By /s/ Theodore Venners
                                 -----------------------
                                     Theodore Venners
                                     Chairman



                              By /s/ Rudolph G. Swenson
                                 -----------------------
                                     Rudolph G. Swenson
                                     Secretary


/s/ Seth L. Patterson
-------------------------
Seth L. Patterson


Seth L. Patterson
-------------------------------------------
13841 Silverton Drive, Broomfield, CO 80020
-------------------------------------------
Address


Taxpayer
Identification Number:

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