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

                                    FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 1998

                                       OR

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

For the transition period from

                         Commission file number 0-27803

                            COVOL TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                       87-0547337
State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization                        Identification No.)

                   3280 North Frontage Road, Lehi, Utah 84043
               (Address of principal executive offices) (Zip Code)

                                 (801) 768-4481
              (Registrant's telephone number, including area code)

 -----------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

         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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

      Class of Stock                                Amount Outstanding
-----------------------------              ----------------------------------
$.001 par value Common Stock               10,560,551 Shares of Common Stock
                                                     at August 5, 1998


<PAGE>

                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                        Page No.

PART I - FINANCIAL INFORMATION

    ITEM 1.      FINANCIAL INFORMATION (Unaudited).......................... 3
                 Consolidated Balance Sheets - As of June 30, 1998 and
                   September 30, 1997
                 Consolidated  Statements  of  Operations - For the three months
                   ended June 30,  1998 and 1997 and for the nine  months  ended
                   June 30, 1998 and 1997
                 Consolidated  Statements  of Cash  Flows - For the nine  months
                   ended June 30, 1998 and 1997
                 Notes to Financial Statements
    ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS....................... 16
    ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                 RISK...................................................... 23

PART I - OTHER INFORMATION

    ITEM 1.      LEGAL PROCEEDINGS......................................... 23
    ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS................. 24
    ITEM 3.      DEFAULTS UPON SENIOR SECURITIES........................... 26
    ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 26
    ITEM 5.      OTHER INFORMATION......................................... 26
    ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K.......................... 26

EXHIBIT 27.1     FINANCIAL DATA SCHEDULE................................... 28


Statements  in this Form  10-Q,  including  those  concerning  the  Registrant's
expectations regarding its business, and certain of the information presented in
this report,  constitute  forward looking  statements  within the meaning of the
Private  Securities  Litigation  Reform Act of 1995. As such, actual results may
vary  materially from such  expectations.  For a discussion of the factors which
could cause actual results to differ from  expectations,  please see the caption
entitled  "Forward  Looking  Statements"  in  ITEM  2  hereof.  There  can be no
assurance  that the  Registrant's  results of  operations  will not be adversely
affected by such factors.

                                        2
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

                                                         As of              As of
                                                        June 30,         September 30,
                                                          1998               1997
                                                       -----------        -----------
         ASSETS

Current assets:
<S>                                                     <C>                <C>
   Cash and cash equivalents                            $3,352,585         $4,780,301
   Receivables:
     Trade Accounts                                      3,537,191             12,595
     Binder Plant Sales                                    457,297                  0
     Stock Subscriptions                                         0            577,500
   Inventories                                           1,272,549          1,818,991
   Advances on inventories                               2,203,868          1,086,964
   Notes receivable - related parties, current             576,499            275,516
   Prepaid expenses and other current assets               191,361             51,865
                                                       -----------        -----------
Total current assets                                    11,591,350          8,603,732
                                                       -----------        -----------

Property, plant and equipment, net of
 accumulated depreciation                               41,265,678         13,619,271
                                                       -----------        -----------
Other assets:
   Notes receivable                                      7,757,290                  0
   Notes receivable - related parties, non-current       3,471,334          3,816,604
   Deposits and other assets                               964,003            321,207
                                                       -----------        -----------
Total other assets                                      12,192,627          4,137,811
                                                       -----------        -----------
Total assets                                           $65,049,655        $26,360,814
                                                       ===========        ===========
</TABLE>


                     The accompanying notes are an integral
                  part of the consolidated financial statements
                                   (continued)

                                        3

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS (continued)
                                   (Unaudited)


                                                                    As of                As of
                                                                   June 30,          September 30,
                                                                     1998                 1997
                                                                 -----------           -----------
         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                 <C>                 <C>
   Accounts payable                                                 $973,534            $1,045,147
   Payable for coal briquetting equipment                          2,670,088             1,967,686
   Due to related party                                              716,688             1,038,667
   Accrued liabilities                                               871,164             1,023,126
   Accrued contractor liability                                      954,000             1,477,000
   Convertible debentures, current                                         0             3,302,422
   Notes payable, current                                         14,436,417             1,945,104
                                                                 -----------           -----------
Total current liabilities                                         20,621,891            11,799,152
                                                                 -----------           -----------
Long-term liabilities:
   Accrued interest                                                  786,683               204,402
   Notes payable, non-current                                     19,397,417             2,900,000
   Notes payable - related parties, non-current                      146,588               489,096
   Deferred revenues from advance licensing fees                   1,400,000             1,650,000
   Deferred compensation                                             232,749               223,891
                                                                 -----------           -----------
Total long-term liabilities                                       21,963,437             5,467,389
                                                                 -----------           -----------
Total liabilities                                                 42,585,328            17,266,541
                                                                 -----------           -----------
Minority interest in consolidated subsidiaries                     2,845,142             3,165,996
                                                                 -----------           -----------
Commitments and contingencies (Note 10)

Stockholders' equity:
   Preferred stock: $0.001 par value;  authorized
    10,000,000 shares, issued and outstanding,
    315,882 shares at June 30, 1998 and 303,024 shares
    at September 30, 1997                                                316                   303
   Common stock: $0.001 par value; authorized 25,000,000
    shares, issued and outstanding, 10,559,266 shares
    at June 30, 1998 and  8,627,290  shares at
    September 30, 1997                                                10,559                 8,627
   Common stock to be issued: 0 shares at June 30, 1998 and
     462,285 shares at September 30, 1997                                  0                   462
   Capital in excess of par value - preferred                      5,184,627             5,094,634
   Capital in excess of par value - common                        57,390,133            41,818,549
   Capital in excess of par value - common stock to be issued              0             3,291,783
   Accumulated deficit                                           (30,762,064)          (32,191,556)
   Notes and interest receivable - related parties from issuance
    of or collateralized by common stock (net of allowance)       (8,221,736)           (7,411,278)
   Deferred compensation from stock options                       (3,982,650)           (4,683,247)
                                                                 -----------           -----------
Total stockholders' equity                                        19,619,185             5,928,277
                                                                 -----------           -----------
Total liabilities and stockholders' equity                       $65,049,655           $26,360,814
                                                                 ===========           ===========
</TABLE>

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

                                        4
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


                                             Three months    Three months        Nine months        Nine months
                                               ended           ended                ended               ended
                                              June 30,        June 30,             June 30,            June 30,
                                                1998           1997                  1998                1997
                                             ----------    -----------             ----------        -----------
Revenues:
<S>                                          <C>              <C>                <C>                   <C>
   License fees                              $3,150,000             $0             $7,736,000                 $0
   Synthetic fuel sales                               0              0                  4,888            124,341
   Returns on synthetic fuel sales                    0              0                      0            (82,500)
   Binder sales                                 608,206        130,112                699,811            134,129
   Binder plant sales                         1,298,000              0              1,298,000                  0
   Coal fines                                   639,711              0              2,543,264                  0
   Operation and maintenance fees                 3,795              0                 70,072                  0
                                             ----------    -----------             ----------        -----------
Total revenues                                5,699,712        130,112             12,352,035            175,970
                                             ----------    -----------             ----------        -----------
Operating costs and expenses:
   Cost of coal briquetting operations        1,436,549        390,224              2,509,971          1,139,916
   Cost of binder plants                      1,094,661              0              1,094,661                  0
   Cost of binder sales                         416,373              0                530,150                  0
   Cost of coal fines                           639,711              0              2,543,264                  0
   Research and development                      80,690         92,856                308,583            263,319
   Selling, general and administrative        1,111,170      1,015,585              3,002,572          2,285,922
   Compensation related to stock options
     and issuance of common stock               285,613        384,414                731,659            933,112
   Loss (gain) on sale of assets                 52,772       (299,822)               (25,628)          (295,626)
   Write-down (write-up) of note
     receivable - related parties,
     collateralized by common stock            (532,188)       143,750             (1,094,688)          (150,000)
                                             ----------    -----------             ----------        -----------
Total operating costs and expenses            4,585,351      1,727,007              9,600,544          4,176,643
                                             ----------    -----------             ----------        -----------
         Operating income (loss)              1,114,361     (1,596,895)             2,751,491         (4,000,673)
                                             ----------    -----------             ----------        -----------
Other income (expense):
   Interest income                              301,899         89,359                604,579            267,216
   Interest expense                                   0       (418,501)            (2,292,432)        (2,052,969)
   Minority interest in net losses (income)
     of consolidated subsidiaries               182,976        (27,366)               320,854            333,304
   Other income                                  15,000         15,438                 45,000             19,891
                                             ----------    -----------             ----------        -----------
Total other income (expense)                    499,875       (341,070)            (1,321,999)        (1,432,558)
                                             ----------    -----------             ----------        -----------
Net income (loss)                            $1,614,236    $(1,937,965)            $1,429,492        $(5,433,231)
                                             ==========    ===========             ==========        ===========
Earnings (loss) per share:
   Basic                                     $     0.15    $     (0.24)            $     0.12        $     (0.69)
   Diluted                                   $     0.12    $     (0.24)            $     0.12        $     (0.69)
                                             ==========    ===========             ==========        ===========

Weighted average shares outstanding:
   Basic                                     10,399,912      8,192,603              9,720,229          7,921,253
                                             ==========    ===========             ==========        ===========
   Diluted                                   13,087,997      8,192,603             12,379,757          7,921,253
                                             ==========    ===========             ==========        ===========
</TABLE>

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

                                        5
<PAGE>
<TABLE>
<CAPTION>

                   COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)




                                                          Nine Months             Nine Months
                                                             ended                   ended
                                                          June 30, 1998           June 30, 1997
                                                          -------------           -------------
Cash flows from operating activities:
<S>                                                          <C>                    <C>
   Net income (loss)                                         $1,429,492             $(5,433,231)
     Adjustments  to reconcile  net income  
     (loss) to net cash used in operating activities:
       Depreciation and amortization                            312,295                 176,253
       Common stock issued for services                               0                 383,305
       Write-up of note receivable - related parties         (1,094,688)               (150,000)
       Interest expense based upon issuance of
        convertible debt and warrants at a discount           2,265,543               1,428,571
       Interest expense related to conversion inducement              0                 323,000
       Compensation related to stock options and
        issuance of common stock                                731,660                 933,112
       Interest earned on notes receivable - related
        parties, collateralized by common stock                       0                 (60,414)
       Loss (gain) on sale of equipment                         (25,628)                  4,196
       Minority interest in net losses of
        consolidated subsidiaries                              (320,854)               (360,626)
   Increase (decrease) from changes in assets:
     Receivables                                             (3,524,596)               (232,743)
     Receivalbes - binder plants                                457,297                       0
     Receivables - related parties                                    0                 (79,540)
     Inventories                                                546,442              (1,576,447)
     Advances on inventory                                   (1,116,904)               (750,000)
     Prepaid expenses and other current assets                 (139,496)                (64,367)
     Deposits and other assets                                  (54,796)                (97,966)
     Accounts payable                                           (71,613)              1,247,049
     Due to related party, net                                 (321,979)                      0
     Accrued liabilities                                        380,759                (199,097)
     Accrued contractor liability                              (523,000)                      0
     Accrued interest                                           582,281                 178,681
     Note payable for inventory                                 768,500                       0
     Deferred compensation                                        8,858                 156,850
     Deferred revenue from advance license fees                (250,000)              1,400,000
                                                          -------------           -------------
Net cash used in operating activities                          (875,021)             (2,773,414)
                                                          -------------           -------------
Cash flows from investing activities:
   Cash paid for property, plant and equipment              (33,715,521)             (6,580,171)
   Issuance of notes receivable                              (1,257,290)                (49,456)
   Deposits collaterizing letters of credit                    (588,000)                      0
   Proceeds from notes receivable                                     0                 129,464
   Proceeds from notes receivable - related party                44,287                  31,608
                                                          -------------           -------------
Net cash used in investing activities                       (35,516,524)             (6,468,555)
                                                          -------------           -------------
</TABLE>

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

                                        6

<PAGE>
<TABLE>
<CAPTION>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)



                                                         Nine Months           Nine Months
                                                            ended                 ended
                                                         June 30, 1998         June 30, 1997
                                                         -------------         -------------
Cash flows from financing activities:
<S>                                                      <C>                    <C>
   Proceeds from issuance of limited partnership
    interests in subsidiaries                                        0               350,000
   Distributions to limited partnership
    interests in subsidiaries                                        0              (292,000)
   Proceeds from notes payable                              32,569,785             6,597,493
   Proceeds from notes payable - related party                       0               109,470
   Payments on notes payable                                    (5,794)             (317,573)
   Payments on notes payable - related parties                (342,508)              (73,683)
   Proceeds from notes receivable - related parties,
    collateralized by common stock                             314,079               106,000
   Proceeds from issuance of preferred stock, (net)             90,006                     0
   Proceeds from issuance of common stock (net)              1,760,761             2,674,023
   Proceeds from receivable - stock subscriptions              577,500                     0
                                                         -------------         -------------
Net cash provided by financing activities                   34,963,829             9,153,730
                                                         -------------         -------------
Net decrease in cash                                        (1,427,716)              (88,239)

Total cash and cash equivalents, beginning of period         4,780,301               490,106
                                                         -------------         -------------
Total cash and cash equivalents, end of period              $3,352,585              $401,867
                                                         =============         =============
Supplemental schedule of noncash investing and 
 financing activities:
   Payable for briquetting facility                         $  702,402                    $0
   Common stock issued on conversion of notes payable        7,686,473             1,263,530
   Common stock issued for notes receivable - related
     party collateralized by common stock                       45,000                     0
   Notes receivable issued for sale of briquetting
     facility                                                6,500,000             3,500,000
   Accrued interest refinanced in notes payable                 40,290                     0
   Notes payable that were refinanced                        1,999,719                     0
</TABLE>


                     The accompanying notes are an integral
                  part of the consolidated financial statements
                                   (continued)

                                        7

<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.       Management Opinion

In the opinion of management,  the  accompanying  financial  statements  present
fairly the financial position of Covol Technologies,  Inc. and Subsidiaries (the
"Company")  as of June 30,  1998 and  September  30,  1997,  the  results of its
operations for the three months and nine months ended June 30, 1998 and June 30,
1997 and its cash flows for the nine  months  ended  June 30,  1998 and June 30,
1997.  The results of operations for the periods  presented are not  necessarily
indicative of the results to be expected for the full year.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted. It is suggested that these financial  statements
be read in conjunction  with the Company's  Annual Report  included on Form 10-K
for the year  ended  September  30,  1997  and the  Company's  Quarterly  Report
included on Form 10-Q for the  quarters  ended  December  31, 1997 and March 31,
1998.

2.       Earnings/Loss Per Share Calculation

During fiscal 1998 the Company  adopted SFAS No. 128 "Earnings Per Share." Basic
earnings (loss) per share is computed based upon the weighted  average number of
common shares outstanding.  The computation of diluted earnings per common share
includes contingent issuances of securities that would have a dilutive effect on
earnings per share.  Contingent  issuances were  antidilutive in each period for
which a net loss was  reported;  therefore,  the amounts  reported for basic and
diluted loss per share are the same for those periods. See Note 9.

3.       Inventories and Advances on Inventories

Inventories  and advances on inventories are stated at the lower of average cost
or market, and consist of synthetic fuel, binder materials, and coal fines.

4.       Change in Estimate of Fair Value of Note Receivable

During the three and nine months ended June 30, 1998, the Company  decreased the
allowance  on the  $5,000,000  face value  note  receivable  from a  stockholder
received  from  the sale of  certain  construction  companies  by  $532,188  and
$1,094,688,  respectively,  to an adjusted  loan value of  $2,684,688 as of June
30,1998.  During the three and nine  months  ended June 30,  1997,  the  Company
increased and decreased the allowance by $(143,750) and $150,000,  respectively.
The  note  is  guaranteed  by the  buyer,  who is the  sole  shareholder  of the
construction companies,  and 150,000 shares of common stock of the Company owned
by the buyer that are held as  collateral  by the  Company.  The  changes in the
allowance  were based  solely on changes  in the market  value of the  Company's
common  stock held as  collateral  for the note  receivable.  The  allowance  is
subject to future fluctuations in the Company's common stock.

5.       Notes Receivable

On November 14, 1997, the Company entered into a financial  agreement with CoBon
Energy,  L.L.C.("CoBon"),  relating to the purchase of equipment for a synthetic
fuel production facility. The original agreement provided that the Company would
purchase,  on CoBon's behalf, up to $1 million worth of equipment for use in the
facility.  Subsequently,  the maximum  amount of the  financing was increased to
approximately  $1,400,000  to provide for  additional  borrowings  by CoBon.  As
consideration for the loan, the Company received the rights to certain royalties
generated  from the  operation of the  facility.  The Company paid  $812,290 for
equipment  and loaned  CoBon  $445,000,  bringing the total note  receivable  to
$1,257,290  as of June 30, 1998.  Subsequent  to June 30, 1998,  the Company and
CoBon agreed that for amounts  advanced on equipment  and amounts  loaned by the
Company, CoBon would 1) pay $660,000 to the Company in equal amounts over the

                                        8
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


5.       Notes Receivable, continued

period  beginning July 1, 1999 and ending September 30, 2002, 2) pay $257,250 to
the Company and 3) pay to the Company $0.10 cents for every dollar of income tax
credit generated by the synthetic fuel facility.

On February 20,  1998,  Alabama  Synfuel #1,  Ltd.(AS#1),  a  subsidiary  of the
Company,  sold a briquetting  facility located in Alabama  ("Alabama  Plant") to
Birmingham  Synfuel,  L.L.C.,  a  wholly-owned  subsidiary  of  PacifiCorp.  The
purchase price was $6,500,000 and resulted in a gain of  approximately  $78,000.
The purchase  price was paid with a note  receivable  that bears interest at 12%
and is to be repaid in equal  consecutive  quarterly  installments,  subject  to
certain  provisions and limitations,  including the net operating cash flow from
the Alabama Plant.  All accrued interest and unpaid principal is due and payable
on February 20, 2003.

6.       Advance on Binder Facilities

During the quarter ended June 30, 1998, the Company applied advances of $790,703
received as of March 31, 1998 from A.T. Massey, PacifiCorp, and CoBon for binder
plants under construction  against amounts billed in connection with the sale of
these binder plants to the licensees.

7.       Notes Payable and Convertible Debentures

A.J.G. Financial Services, Inc.

During October 1997, the Company entered into an agreement with A.J.G. Financial
Services, Inc. ("AJG") to provide financing of approximately  $4,300,000 for the
building  of a coal  wash  plant at an  interest  rate of 6%. In  addition,  the
Company granted warrants in an amount equal to 10% of the amount financed.  Half
of these  warrants  have a strike  price of $10 and half have a strike  price of
$20.  Based upon the market price of the  Company's  common stock on the date of
the  agreement,  $398,222 of interest  expense was recognized due to issuance of
the $10 warrants. As of June 30, 1998, the Company had borrowed $4,325,433 under
this arrangement.  Principal and interest are due 2 years from the date the debt
was incurred.  The Company began start-up testing of the wash plant during April
1998  and  began  normal  operation  of the  plant  in June  1998.  

During the quarter ended March 31, 1998, the Company  entered into an additional
agreement  with AJG to borrow up to $6.5  million at an interest  rate of 6% per
annum to be used for  construction  of a  briquetting  facility  located in West
Virginia.  As of June 30, 1998 the Company had  received  $6,680,000  under this
borrowing  arrangement.  In July 1998,  the Company  repaid  $180,000 under this
arrangement  to bring the net  borrowings to $6.5 million under this  agreement.
50% of the  accrued  interest is due  February  1999 with the balance of accrued
interest and principal due in full in February 2001. The loan is  collateralized
by the  synthetic  fuel  facility  constructed  with the proceeds and by certain
earned  license  fees that may be payable to the  Company  from  synthetic  fuel
facilities constructed by AJG.

PacifiCorp Financial Services, Inc.

During  December  1997,  the Company  executed a  Convertible  Loan and Security
Agreement  with  PacifiCorp  Financial  Services,  Inc.  ("PFS").  The agreement
modifies an  agreement  finalized on March 20, 1997 which  provides  funding for
completing  construction  of the Alabama  project,  acquiring coal fines and for
other purposes  related to the project.  The  modification  increased the amount
available from  $5,000,000 to $7,000,000  with a provision that borrowings up to
the lesser of actual  borrowings or $6,000,000 are convertible into common stock
under the same terms as the  original  March 20, 1997  agreement  (at a price of
$7.00 per share). Based upon the December 1997 amendment, an interest expense of
$714,286 was  recognized  during the quarter ended December 31, 1997 because the
conversion price is below the market price.

                                        9
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


7.       Notes Payable and Convertible Debentures, continued

PacifiCorp Financial Services, Inc., continued

Effective  March 3, 1998, PFS exercised  their option to convert all outstanding
borrowings under this  arrangement  into 1 million shares of common stock..  The
conversion of the  borrowings in excess of $6,000,000  resulted in an additional
interest charge of $714,285 during the quarter ending March 31, 1998 because the
conversion  price is below the market  price.  In addition,  the Company  issued
27,000  shares of common stock to PFS under the  antidilution  provisions of its
conversion  agreement.  This resulted in the issuance of additional common stock
with a value of  approximately  $220,000.  This  amount was  charged to interest
expense during the quarter ended March 31, 1998.

DTE Energy Services, Inc.

In October 1997, the Company entered into a financial  agreement with DTE Energy
Services,  Inc.  ("DTE")  relating to the  purchase of  equipment  for up to two
synthetic fuel production facilities. The agreement allowed for borrowings up to
$2,000,000  with interest at LIBOR plus 1.0%.  The Company  borrowed  $1,999,719
under the agreement. These borrowings were repaid in full during May 1998.

Trans Pacific Stores

On March 17, 1998, the Company  entered into a loan agreement with Trans Pacific
Stores,  Ltd.  ("TPS")  wherein TPS agreed to loan the Company up to $4,000,000.
The loan is  collateralized by future earned license fees payable to the Company
from the synthetic  fuel  manufacturing  facilities  constructed  by Pace Carbon
Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at twelve
percent (12%) per annum. The interest rate is adjusted to thirteen percent (13%)
on September 20, 1998 and to fourteen  percent (14%) on December 20, 1998.  Each
time the interest rate is adjusted, a one percent (1%) renewal fee of $40,000 is
due and payable.  Interest on the unused  portion of the  borrowing  will accrue
interest  at one  percent  (1%) per annum  until  the loan is paid in full.  The
outstanding  principal  and interest is due in full before March 20, 1999. As of
June 30, 1998, the full $4 million had been borrowed under this arrangement.

On June 12, 1998,  the Company  entered into an additional  loan  agreement with
Trans  Pacific  Stores,  Ltd.  wherein  TPS  agreed  to loan the  Company  up to
$4,000,000. Collateral for the first $2,200,000 of borrowings under this note is
a continuing interest in the promissory note as amended August 26, 1996 received
by the Company in connection  with the sale of certain  construction  companies;
collateral for borrowings  for the next  $1,800,000 is a continuing  interest in
future cash flows payable to the Company  pursuant to an agreement  between A.T.
Massey  ("Massey")  and the  Company  dated  December  4, 1997.  Interest on the
outstanding  principal  balance accrues at eighteen  percent (18%) per annum. On
the four-month  anniversary of this note, the interest rate shall be adjusted to
twenty-two  percent (22%) per annum,  until the loan has been paid in full.  All
principal and interest is due and payable on or before  twelve months  following
execution  of this note.  TPS could also be granted  warrants  to purchase up to
100,000  shares of restricted  common stock of the Company in an amount equal to
100,000  multiplied  by the quotient of the  outstanding  borrowings  divided by
$4,000,000,  at an  exercise  price  equal  to  the  closing  bid  price  on the
four-month  anniversary of the loan.  Warrants granted, if any, may be exercised
within two years of the date of issuance.  As of June 30, 1998,  $2,000,000  had
been  borrowed  under  this  arrangement.  A member  of the  Company's  Board of
Directors is affiliated with TPS.

                                   (continued)

                                       10
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


7.       Notes Payable and Convertible Debentures, continued

Fun Enterprises

On January 29, 1998, the Company entered into a loan and security agreement with
Fun  Enterprises,  Pty Ltd.  ("Fun"),  a current holder of the Company's Class B
preferred  stock,  relating to the  development  and  construction  of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern  coal  company.  The  agreement  allows  the  Company  to  borrow  up to
$5,800,000.  The loan is secured by the synthetic  fuel  facility.  The interest
rate will be 12% per annum until August 31, 1998,  and 15% per annum  thereafter
until paid in full.  Fun will also have the right to receive  certain  royalties
after the facility is sold. As of June 30, 1998 the Company has drawn $5,666,363
on the loan.  The loan is due in full at the earlier of the sale of the facility
or August 31, 1999.

Mountaineer Synfuel, L.L.C.

On  May  5,  1998,  the  Company  entered  into  an  Asset  Purchase   Agreement
("Agreement")  with  Mountaineer  Synfuel,  L.L.C.("Mountaineer"),  wherein  the
Company agreed to sell to Mountaineer a synthetic fuel facility  located in West
Virginia upon the occurrence of certain future events.  In connection  with this
Agreement,  Mountaineer  agreed to loan the Company up to  $8,500,000 to be used
for the construction and working capital  requirements of the facility.  Amounts
loaned are to be repaid upon the earlier of the Closing  Date of the purchase or
January 1, 1999. As of June 30, 1998,  $8,250,000  had been received  under this
Agreement,  of  which  $8,250  came  from  the  Company  as the  owner  of a .1%
membership interest in Mountaineer.

Convertible Subordinated Debentures

In  November  1996,  the  Company  issued  convertible  subordinated  debentures
totaling  $1,000,000.  The debentures accrue interest at prime rate plus 2% with
principal  and interest  payable in full on June 30, 1998.  The  debentures  and
accrued  interest are convertible into common stock of the Company at $11.00 per
share.  On June 30, 1998 the $1,000,000 of debentures  together with the accrued
interest of $178,904 were converted into 107,174 shares of common stock.

                                       11
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


7.       Notes Payable and Convertible Debentures, continued

The following is a table  summarizing  notes payable and convertible  debentures
previously discussed.
<TABLE>
<CAPTION>

                                                                                          June 30, 1998         September 30, 1997
<S>                                                                                       <C>                    <C>
Note payable to a corporation,  bearing interest at 6%  collateralized  by plant
and  equipment.  Principal and interest due October 1999                                  $   4,325,433          $   1,057,849
Note payable to a corporation,  bearing  interest at 6%. 50% of accrued interest
due in  February  1999 and  balance of accrued  interest  and  principal  due in
February 2001                                                                                 6,680,000                      -

Note payable to a corporation  bearing interest at prime (8.5% at June 30, 1998)
plus 2%, net. Collateralized by plant and equipment.  Principal and interest due
December 20, 1999                                                                             2,825,681              2,787,255

Convertible  note payable to a corporation,  bearing interest at prime (8.50% at
June 30, 1998) plus 2%. Collateralized by plant,  equipment and coal fines. Loan
of $6,686,473 plus accrued interest of $313,527 converted to common stock March
20, 1998.                                                                                             -              3,302,422

Note payable to a corporation  bearing interest at 18% for the first four months
then adjusted to 22% thereafter  collateralized by a certain promissory note and
by certain future earned license fees. If unpaid after four months, warrants are
to be granted based on outstanding balances. Amounts are due on or before June
12, 1999.                                                                                    2,000,000                       -

Note payable to a corporation.  Interest on the  outstanding  principal  balance
accrues at twelve  percent  (12%) per annum.  The  interest  rate is adjusted to
thirteen  percent (13%) on September  20, 1998 and to fourteen  percent (14%) on
December 20, 1998. The balance and accrued interest is due in full before March
20, 1999 and is collateralized by certain future earned license fees.                        4,000,300                       -

Note payable to a corporation bearing interest at 12% per annum until August 31,
1998, and 15% per annum thereafter until paid collateralized by a synthetic fuel
facility. The loan is due in full at the earlier of the sale of the facility or
August 31, 1999                                                                              5,666,363                       -

Note  payable to a limited  liability  company  issued in  conjunction  with the
construction  of a  synthetic  fuel  facility.  The  loan  is due in full at the
earlier of the sale of the facility or January 1, 1999.                                      8,241,750                       -

Other                                                                                           94,307                       -

Convertible  debentures to two  individuals and one trust,  bearing  interest at
prime (8.5% at March 31, 1998) plus 2%. Principal and interest due June 30,
1998. Convertible at $11.00 per share. Converted to common stock June 30, 1998.                      -               1,000,000
                                                                                         -------------           -------------
                                                                                           $33,833,834              $8,147,526
   Less: current portion                                                                   (14,436,417)             (5,247,526)
   Total non-current                                                                     -------------           -------------
                                                                                           $19,397,417              $2,900,000
                                                                                         =============           =============
</TABLE>

                                       12

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


8.       Stockholders' Equity

                      The table below  presents  the  activity in  stockholders'
equity from April 1, 1998 through June 30, 1998.

<TABLE>
<CAPTION>
                                                                                                                Notes and
                                                                                                                 interest
                                                                                                                receivable
                                                                                                                -related
                                                                                                                parties
                                                                                                                  from
                                                                                                                issuance
                                                                                                                 of, or    Deferred
                       Preferred Stock            Common Stock          Common Stock to be  issued               collater-   compen-
                                 Capital in                Capital in                Capital in               alized       sation
                                 excess of                  excess of                excess of  Accumulated  by, common  on stock
                 Shares  Amount  par value  Shares  Amount  par value Shares Amount  par value   Deficit        stock      options
                 ------  ------  ---------  ------  ------  --------- ------ ------  ---------   -------     -----------   -------
<S>           <C>       <C>   <C>        <C>       <C>     <C>        <C>    <C>      <C>    <C>         <C>            <C>
Balance at
January 1,
1998           315,882  $316  $5,184,627 10,256,175 $10,256 $55,104,727 63,060  $63   $417,638 ($32,376,300)($7,701,798)($4,268,263)

Common stock
issued for
cash from
exercise of
stock options                               195,917   196   1,106,609  (63,060) (63)   (417,638)

Conversion of
notes payable                               107,174   107   1,178,797

Cash received in
payment on
notes receivable
- related
parties from
issuance of
common stock                                                                                                    12,250

Amortization of
deferred
compensation on
stock options                                                                                                               285,613

Write-up of note
receivable -
related parties                                                                                               (532,188)

Net income for
the quarter
ended June
30, 1998                                                                                        1,614,236
                -------  ----  ---------- ---------- ------- ----------- ------ --- -------- ------------  ----------  ----------
Balance at
June 30, 1998   315,882  $316  $5,184,627 10,559,266 $10,559 $57,390,133      0 $0  $      0 ($30,762,064)($8,221,736)($3,982,650)
                =======  ====  ========== ========== ======= =========== ====== === ========  ===========  ==========  ==========

</TABLE>

                                       13
<PAGE>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


9.       Computation of Earnings (Loss) Per Share (EPS)

<TABLE>
<CAPTION>

                                                     Three months ended                         Nine months ended
                                                       June 30, 1998                               June 30, 1998




                                                  Basic                Diluted               Basic               Diluted

<S>                                               <C>                  <C>                   <C>                 <C>
Net Income (loss) - diluted EPS                   $   1,614,236        $   1,614,236         $  1,429,492        $  1,429,492

   Preferred stock dividends accrued                    (84,683)                                 (279,562)

Net income (loss) - basic EPS                     $   1,529,553                             $   1,149,930



Number of common shares outstanding                  10,559,266           10,559,266           10,559,266          10,559,266

   Effect of using weighted average common
      shares outstanding                               (159,354)            (159,354)            (839,037)           (839,037)

Weighted average number of common shares
outstanding
 (basic earnings per share)                          10,399,912           10,399,912            9,720,229           9,720,229

Dilutive effect:

   Common stock options                                                    1,291,825                                1,274,258

   Common stock warrants                                                     654,807                                  643,817

   Convertible preferred stock                                               741,453                                  741,453

Dilutive weighted average number of common
  shares outstanding                                                      13,087,997                               12,379,757
</TABLE>

Options to purchase 2,340,250 shares of common stock at prices between $1.50 and
$13.56 per share were  outstanding  during the third  quarter of fiscal 1998 and
were included in the  computation of diluted EPS. For the quarter ended June 30,
1997,  these  options  were not  included in the  computation  of loss per share
because any effect would have been antidilutive.

Warrants to purchase  1,967,260  shares of common stock at prices  between $7.00
and $30.00 per share were  outstanding  during the third  quarter of fiscal 1998
and  warrants  with an  exercise  price of $15.75 or less were  included  in the
computation  of diluted EPS. For the quarter ended June 30, 1997,  warrants were
not included in the  computation of loss per share because any effect would have
been antidilutive.

Convertible debt of $1,000,000 was converted into 107,174 shares of common stock
during the third  quarter of fiscal 1998.  For the quarter  ended June 30, 1997,
convertible  debt was not included in the  computation of loss per share because
any effect would have been antidilutive.

Preferred stock  convertible into 741,453 shares of common stock at the price of
$7.00 per share were  outstanding  during the third  quarter of fiscal  1998 and
were included in the computation of diluted EPS.

                                       14
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


10.      Commitments and Contingencies

During 1996, the Company or its licensees  entered into thirty contracts for the
construction   of   manufacturing   facilities  that  would  use  the  Company's
proprietary  Briquetting  Technology  in  the  conversion  of  coal  fines  into
synthetic fuel. All of these  construction  contracts  contain  penalties if the
contracting  party fails to proceed with the  construction of these  facilities.
Fifteen of these  construction  contracts were entered into by independent third
parties and the Company was not a party.  Accordingly,  no liability for failing
to proceed exists with these contracts. Four contracts were entered into jointly
by the Company and its joint  venture  partners.  The  remaining  eleven are the
Company  contracts.  Of the  contracts  for which the Company has  liability  or
shared  liability  there  are two  joint  venture  facilities  that  will not be
constructed  and there  are three  contracts  where  the  facilities  may not be
constructed.  As of  September  30,  1997,  the Company  accrued a liability  of
$1,477,000  for these  potential  penalties.  During the first nine months ended
June 30, 1998, the Company paid penalties in the amount of $205,000 and reversed
$318,000  for  a  construction  contract  where  the  project  was  constructed.
Accordingly,  as of June 30, 1998, the remaining accrued contractor liability is
$954,000.

In December 1996,  the Company  entered into six  indemnification  agreements in
connection with six of the  construction  contracts  entered into by independent
third  parties.  These  contracts  contain  liquidating  damages of $750,000 per
contract if construction of the facilities is not completed by June 1, 1998. The
Company has  indemnified  the contractor for these  potential  liabilities.  The
contracting  party  has  decided  not to  construct  three of these  facilities.
Accordingly,  the Company believes the maximum contingent  liability under these
indemnification  agreements is $2,250,000. As of the date of the current filing,
the other three  facilities  were  mechanically  complete and  operational.  The
Company believes that payment of this liability is unlikely and has,  therefore,
not recorded a liability for these potential penalties.

The  Company  entered  into a letter  of  intent  with  Innovative  Technologies
("Innovative") in July of 1995 to apply the Company's Briquetting  Technology to
certain  metallic ores supplied by Innovative.  The Company  conducted  numerous
tests of the ore through the fall of 1995,  and concluded  from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997,  Innovative Holding Company,  Inc.,
filed a civil  complaint  against the Company  alleging  breach of the letter of
intent in the amount $500,000 plus damages. This case is currently in trial. The
Company is vigorously defending the suit and believes that it will be successful
in such defense.

During  June  1998,  the  Company  entered  into an  agreement  with a bank that
provides for the issuance of letters-of-credit  in an amount up to $700,000.  As
of June 30, 1998 there were $440,000 of letters-of-credit issued and outstanding
under the agreement.  The Company has $350,000 on deposit with this bank that is
held as collateral for these  letters-of-credit  and is included in deposits and
other assets in the accompanying balance sheet.

On April 21, 1998 the Company entered into separate loan agreements with each of
Carbon Resources and C.C. Pace Capital,  L.L.C. (the  "Borrowers"),  to lend, in
quarterly  installments,  up to an  aggregate  principal  amount  not to  exceed
$14,250,000  each during the period from and  including  November 1, 1998 to and
including  February 1, 2008. The Company has agreed to make the initial  advance
on November 1, 1998 in the amount of $375,000, or such other amounts as provided
for in the loan  agreement,  and  thereafter on the first day of each  February,
May,  August  and  November  during  the loan  period.  Interest  accrues on the
principal  amount of the loan outstanding at a simple annual rate of six percent
(6%).  Repayment of the loan shall be paid from amounts, if any,  distributed to
the Borrowers by the General Partner of Pace Carbon  Synfuels,  L.P., which owns
100% of the  memberships  in the Project  Companies  discussed in the  following
paragraph.

                                       15
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


10.      Commitments and Contingencies, continued

The Company also entered into Amended and Restated  License and Binder  Purchase
Agreements with each of PC Virginia  Synthetic Fuel #1, L.L.C., PC West Virginia
Synthetic Fuel #1, L.L.C.,  PC West Virginia  Synthetic Fuel #2, L.L.C.,  and PC
West Virginia Synthetic Fuel #3, L.L.C.,  (collectively the "Project Companies")
as of February 3, 1998. The Company is entitled to receive  royalties  under the
terms and as described in the Licensing  Agreements.  The  Licensing  Agreements
provide for a one-time  advance  license  fee and earned  royalty on a quarterly
basis at a prescribed  amount  multiplied  by the MM btu content per ton of each
product.

                                       16
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Results of Operations

Three  months  ended June 30, 1998  compared to the three  months ended June 30,
1997

         Revenues. For the quarter ended June 30, 1998, total revenues increased
by $5,569,590 to  $5,699,712  from $130,112  reported for the quarter ended June
30, 1997.  There were  $3,150,000 in advance  license fees  reported  during the
quarter  ended June 30, 1998 while no license  fees were  recognized  during the
quarter  ended  June  30,  1997.  Advance  license  fees are  normally  due when
construction of the related  briquetting  facility begins,  when construction is
completed,  or when certain construction milestones or other conditions are met.
Advance license fees  recognized  during the quarter ended June 30, 1998 related
to  four  technology   licensees  covering  ten  synthetic  fuel  facilities  or
production  lines which became  operational in June 1998. The Company had binder
sales in the amount of $608,206 for the quarter  ended June 30, 1998 as compared
to $130,122  for sales that were made in the quarter  ended June 30,  1997.  The
Company expects binder sales to increase  proportionate to future synthetic fuel
production and sales increases.  The Company recieved revenues from binder plant
sales of  $1,298,000  during the quarter ended June 30, 1998 while no such sales
occured  during the same period ending June 30, 1997.  These  revenues  resulted
from the sale of seven binder  plants.  The Company  received  revenues from the
sale of coal fines in the amount of $639,711 for the quarter ended June 30, 1998
under an  agreement  to sell the coal  fines at  their  cost.  The  Company  had
revenues  from  operation and  maintenance  fees of $3,795 for the quarter ended
June 30, 1998 and no such fees for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$2,858,344  to $4,585,351  for the quarter  ended June 30, 1998 from  $1,727,007
reported  for the quarter  ended June 30,  1997.  Operating  costs and  expenses
attributable to the briquetting  operations  increased  $2,557,359 to $2,947,583
for the quarter ended June 30, 1998 from $390,224 for the quarter ended June 30,
1997.  The increase in briquetting  operations  costs for the quarter ended June
30, 1998 was a direct result of increased  activities  related to the completion
of construction of synthetic fuel facilities,  increased  activities  related to
the   refinement  of  the   briquetting   process  and  issues  related  to  the
implementation  of the Company's  technology  as  production at the  twenty-four
facilities commenced. Utah Synfuel #1, a Delaware limited partnership ("US #1"),
and the Company sold a synthetic fuel facility at Price, Utah ("Utah Plant"), to
Coaltech.  In  connection  with the sale,  US #1 entered  into an  agreement  to
purchase all synthetic fuel production at the Utah Plant for costs incurred plus
$1 per ton.  The Utah  Plant has  incurred  significant  costs  for coal  fines,
including  the  costs to wash the  fines,  and  manufacturing  costs as it works
through various production issues.  These costs are included in the cost of coal
briquetting operations.  It is anticipated that the sales price of the synthetic
fuel  purchased by US#1 will be  significantly  less than its cost.  As the wash
plant and synthetic  fuel facility move towards  normal  operational  levels and
efficiencies,  the Company  anticipates  that the costs incurred per ton for the
synthetic  fuel  produced  will be more in line  with  the  sales  price  of the
synthetic fuel and will reduce the net operating  loss currently  resulting from
these  operations.  During the quarter ended June 30, 1998 the Company  incurred
$639,711  in cost of coal  fines  sold under the  arrangement  discussed  in the
previous paragraph.

         Research and  development  costs  decreased  $12,166 during the quarter
ended June 30,  1998 from  $92,856  for the quarter  ended June 30,  1997.  This
decrease  is  primarily  due to the  reduction  in use of  outside  professional
services.  The Company expects  continued  research and development costs in its
ongoing efforts to refine further the Company's synthetic fuel technology and in
pursuing other applications of this technology.

         Selling,  general  and  administrative  expense  increased  $95,585  to
$1,111,170  for the quarter ended June 30, 1998 from  $1,015,585 for the quarter
ended June 30, 1997.  The increase  relates to  necessary  personnel  increases,
increased  outside  professional  services  relative to  facility  construction,
increased  travel  and  related   out-of-town   expenses   incurred  to  monitor
construction and start-up operations at the numerous facility locations, and

                                       17
<PAGE>

general  infrastructure  cost  increases  as the Company  continues  to grow and
expand,  and partially  offset by a decrease  resulting from a $342,805  expense
incurred in 1997 relating to stock issued in settlement of certain claims.

         For the  quarter  ended  June 30,  1998,  the total  operating  expense
increase was partially  offset by a decrease in compensation  expense  resulting
from the  issuance of stock and stock  options as compared to the quarter  ended
June 30, 1997. The decrease of $98,801 is attributable to a reduction in the use
of stock and stock  options in  compensating  employees and  consultants  of the
Company and to the general change in the Company philosophy regarding the strike
price for options granted.  Generally, stock options that will be granted by the
Company in the  future  are not  expected  to be  "in-the-money"  at the date of
grant.

         In fiscal 1996,  the Company was  required,  under  generally  accepted
accounting principles,  to adjust the $5 Million 6% promissory note (the "Note")
from  the  sale  of  Industrial   Management  and   Engineering,   Inc.,   State
Incorporated,   Central  Industrial  Construction,  Inc.  and  Larson  Limestone
Company, Inc. (the "Construction  Companies") to the most ascertainable value of
collateral held in support of the loan which was the Company's common stock. For
the quarter ended June 30, 1998, this  adjustment  resulted in a write-up of the
Note by $532,188 compared to a write-down of $143,750 for the quarter ended June
30,  1997.  The  Note  is  guaranteed  by the  buyer,  sole  shareholder  of the
Construction Companies,  and there has been no event of default or incurrance of
past due payments on the Note.  The Company  currently  has no reason to believe
that the payments under the terms of the Note will not be made when due.

         Total Other Income and  Expenses.  For the quarter ended June 30, 1998,
the Company had other income totaling  $499,875.  For the quarter ended June 30,
1997,  the Company had other  income  totaling  $104,797  and other  expenses of
$445,867 for net other  expenses  totaling  $341,070.  This decrease of $840,945
consisted  principally  of a decrease  in  interest  expense of  $418,501  which
resulted from the issuance of convertible  debt where the  conversion  price was
"in-the-money"  during  the  quarter  ended  June 30,  1997 and an  increase  in
interest income of $212,540 during the quarter ended June 30, 1998. The minority
interest  in the  net  losses  of the  consolidated  subsidiaries  increased  by
$210,342  as a result of  increased  net  losses of US # 1 and AS #1 during  the
quarter ended June 30, 1998 as compared to the comparable period in 1997.

         The Company has net operating loss  carryforwards that are available to
offset future taxable income.  Because the Company has not generated significant
taxable income relating to the Briquetting Technology net income, no benefit has
been  recorded  relative to the future  utilization  of the net  operating  loss
carryforwards.  This  benefit  may be  recorded  in the near term if the Company
continues to realize taxable income.

         Net Income.  For the quarter  ended June 30, 1998,  the Company had net
income of $1,614,236  as compared with a net loss of $1,937,965  for the quarter
ended June 30, 1997. As discussed  previously,  this increase resulted primarily
from a significant increase in total revenues and other income, partially offset
by a significant increase in operating costs and expenses.

         Amended Form 10-Q. All financial  information for the quarter ended and
the nine months ended June 30, 1997 and comparisons  between that period and the
corresponding  period in 1998 are based upon the restated  financial  statements
filed in the  Company's  Form 10-Q/A,  Amendment No. 1 for the period ended June
30, 1997 as filed on August 12, 1998.

Results of Operations

Nine  months ended June 30, 1998 compared to the nine months ended June 30, 1997

         Revenues.  For the nine  months  ended June 30,  1998,  total  revenues
increased by $12,176,065 to $12,352,035  from $175,970 for the nine months ended
June 30, 1997. There were $7,736,000 in advance license fees received during the
nine months ended June 30, 1998 while no license fees were received during the

                                       18
<PAGE>

comparable  period  during  1997.  Advance  license  fees are  normally due when
construction of the related  briquetting  facility begins,  when construction is
completed, or when certain construction milestones or other conditions are met.

         The Utah Plant was placed in service in early 1997. However, production
and sales of synthetic fuel were significantly  curtailed due to the high levels
of ash content in feedstock  used for  production.  To remedy the problem of ash
content,  the  Company  constructed  a wash plant for the Utah Plant that became
operational  during the quarter ended June 30, 1998. The wash plant continues to
undergo  operational  inprovements  and  modifications  and has not yet  reached
expected output capacity. Accordingly, synthetic fuel sales of $4,888 during the
nine months ended June 30, 1998 were less than the sales of $124,341  during the
corresponding  period ended June 30, 1997. The Company believes that as the wash
plant reaches operational capacity, it will be able to supply sufficient quality
coal fines to the Utah Plant to allow the plant to operate profitably at or near
capacity.  The Company has had various  discussions with potential  end-users of
the synthetic fuel product. However, there is currently no contract in place for
the purchase of the synthetic  fuel produced at the Utah Plant.  The Company had
binder  sales in the amount of $699,811  for the nine months ended June 30, 1998
as compared to sales of $134,129 during the nine months ended June 30, 1997. The
Company expects binder sales to increase  proportionate to future synthetic fuel
production and sales increases.  The Company  received an additional  $1,298,000
from binder plant sales for the quarter ended June 30, 1998; no such revenue was
received for the same period ending June 30, 1997. The Company received revenues
from the sale of coal  fines in the  amount of  $2,543,264  for the nine  months
ended June 30, 1998 under an  agreement to sell the coal fines at their cost and
had operation and maintenance fees of $70,072 for the nine months ended June 30,
1998 and no such fees for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$5,423,901 to $9,600,544 for the nine months ended June 30, 1998 from $4,176,643
for  the  nine  months  ended  June  30,  1997.  Operating  costs  and  expenses
attributable to the briquetting  operations  increased  $2,994,866 to $4,134,782
for the nine  months  ended June 30,  1998 from  $1,139,916  for the nine months
ended June 30, 1997. The increase in briquetting  operations  costs for the nine
months ended June 30, 1998 was a direct result of increased  activities  related
to the  completion  of  construction  of synthetic  fuel  facilities,  increased
activities  related to the  refinement  of the  briquetting  process  and issues
related to the  implementation of the Company's  technology as production at the
twenty-four facilities commenced. During the nine months ended June 30, 1998 the
Company  incurred  $2,543,264 in costs for coal fines sold under the arrangement
previously discussed.

         Research and  development  costs increased 17.2% to $308,583 during the
nine months ended June 30, 1998 from $263,319 for the nine months ended June 30,
1997.  The Company  expects  continued  research  and  development  costs in its
ongoing efforts to refine further the Company's synthetic fuel technology and in
pursuing other applications of this technology.

         Selling, general and administrative expense increased $716,650 or 31.4%
to $3,002,571  for the nine months ended June 30, 1998 from  $2,285,922  for the
nine months ended June 30, 1997.  The  increase  relates to necessary  personnel
increases,   increased  outside  professional   services  relative  to  facility
construction,  increased  travel and related  out-of-town  expenses  incurred to
monitor construction and start-up operations at the numerous facility locations,
and general  infrastructure  cost increases as the Company continues to grow and
expand to meet operational needs.

         For the nine months ended June 30, 1998, compensation expense resulting
from the issuance of stock and stock  options  decreased by $201,453 as compared
to the nine months ended June 30,  1997.  The  decrease is  attributable  to the
reduction in the use of stock and stock  options in  compensating  employees and
consultants of the Company. The reduction is also reflective of a general change
in the  Company's  philosophy  regarding  the strike price for options  granted.
Generally,  stock  options that will be granted by the Company in the future are
not expected to be "in-the-money" at the date of grant.

         For the nine months ended June 30, 1998, the adjustment relative to the
note received from the sale of the Construction Companies resulted in a write-up
of the Note by $1,094,688 compared to a write-up of $150,000 for the nine months
ended June 30, 1997.  The Note is  guaranteed  by the Buyer of the  Construction
Companies  and there has been no event of  default  or past due  payment  on the
Note.

                                       19
<PAGE>

The Company currently has no reason to believe that the payments under the terms
of the Note will not be made when due.

         Total Other  Income and  Expenses.  For the nine months  ended June 30,
1998,  the Company had other income  totaling  $970,433 and interest  expense of
$2,292,432 for net other expenses of $1,321,999.  For the nine months ended June
30, 1997, the Company had other income totaling $620,411 and interest expense of
$2,052,969  for net other  expenses of  $1,432,558.  This  decrease in net other
expenses of $110,559 consisted principally of an increase in interest expense of
$239,736  resulting from the issuance of  convertible  debt where the conversion
price was "in-the-money", and an increase in interest income of $337,363.

         Net Income.  For the nine months ended June 30,  1998,  the Company had
net income of $1,429,492 as compared with a net loss of $5,433,231  for the nine
months ended June 30, 1997 resulting in a net increase of $6,862,723.


Liquidity and Capital Resources

         For the nine  months  ended  June 30,  1998,  management  believes  the
Company made significant progress in its movement from continued development and
refinement of the Company's proprietary technology to commercial operations. The
decrease in cash used by the Company in operating  activities of $2,648,826  for
the nine months  ended June 30, 1998 to $124,588  from  $2,773,414  for the nine
months  ended June 30,  1997 was  largely  due to the net  income of  $1,429,492
realized  for the nine months  ended June 30,  1998  compared to the net loss of
$5,433,231 for the nine months ended June 30, 1997. This significant improvement
in funds  provided by  operations  was offset by increases in accounts and notes
receivable, inventories and a decrease in accounts payable.

         The  Company  made cash  payments  for  property,  plant and  equipment
totaling $34,240,955 during the nine months ended June 30, 1998. These additions
related to the wash plant at the Utah Plant, construction of four synthetic fuel
facilities and other miscellaneous  purchases. The Company is currently pursuing
the sale of the four synthetic fuel  facilities.  This  investment was funded by
cash  available at September 30, 1997,  proceeds from  borrowings of $32,569,785
and proceeds from issuances of stock of $1,850,767. The Company believes it will
be able to meet future cash flow needs through additional borrowings,  issuances
of equity securities, and from cash generated by operations.

         During  December  1997,  the  Company  executed  an  amendment  to  the
Convertible Loan and Security Agreement with PacifiCorp Financial Services, Inc.
("PFS").  The  agreement  modifies an agreement  reached on March 20, 1997 which
provides funding for completing  construction of the Alabama Plant and acquiring
coal fines and for other  purposes  related  to the  project.  The  modification
increased the amount  available from  $5,000,000 to $7,000,000  with a provision
that  borrowings  up to the  lesser  of  actual  borrowings  or  $6,000,000  are
convertible  into common  stock under the same terms as the  original  March 20,
1997 agreement (at a price of $7.00 per share). As of March 3, 1998,  PacifiCorp
exercised its option to convert the full amount owing under the loan into shares
of common stock.  The Company had borrowed  $6,686,473  and interest of $313,527
had been accrued.  An agreement was reached  between the Company and  PacifiCorp
which  allowed  them to convert  the full  $7,000,000  owing under the loan into
1,000,000  shares of common stock.  The Company also issued 27,000 shares to PFS
under antidilution provisions of this agreement.

         On March 6, 1998 the Company and Alabama  Synfuel #1 completed the sale
of a synthetic fuel briquetting plant in Birmingham, Alabama to PacifiCorp under
the  terms  of the  Project  Purchase  Agreement  dated  March  20,  1997 and as
subsequently amended. The purchase price for the facility was $6,500,000 and was
paid with a note that bears  interest  at twelve  percent  (12%) per annum.  The
promissory note executed by PacifiCorp to the Company is  collateralized  by the
Alabama Plant and provides for periodic payments through February 2003.

         In  October  1997,  the  Company  entered  into an  agreement  with AJG
Financial  Services,  Inc. ("AJG"),  whereby AJG agreed to provide financing for
the wash plant being constructed by the Company to provide washed coal fines to

                                       20
<PAGE>

the Utah Plant.  The  financing  consists of a note  bearing  interest at 6% per
annum with  principal  and  interest due and payable two years from the time the
debt is incurred.  As additional  consideration  to AJG for the  financing,  the
Company issued  warrants to purchase  Company common stock in an amount equal to
10% of the dollar  amount  financed,  with fifty  percent of the shares having a
purchase  price of $10 per  share  and  fifty  percent  of the  shares  having a
purchase price of $20 per share.  The warrants are  immediately  exercisable and
expire in two years.

         As of June 30,  1998,  the  Company  had a working  capital  deficit of
$9,030,541  compared to a working capital deficit of $3,195,420 at September 30,
1997.  This  increase  resulted  primarily  from  financing  of  synthetic  fuel
facilities  construction under short-term  financing  arrangements.  At June 30,
1998, the Company owned four synthetic  fuel  facilities  that were completed in
June and all of which were  operational  and  available  for sale.  The  Company
expects to sell these facilities and with the proceeds from the sales retire the
related  borrowings.  The Company believes that additional advanced license fees
to be received, earned license fees to be received and, if necessary,  available
financing  will be sufficient  to fund the  operations of the Company until cash
flows from operations are sufficient to fund the Company's operations.  However,
there is no  assurance  that the  Company  will be able to obtain the  necessary
financing  or  receive  sufficient  cash  flows  from  operations  to  fund  its
operational needs or to meet unexpected financing needs.

         The Company  anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting  Technology;  (ii) operating fees for
the operation of facilities  owned by third parties;  (iii) payments on accounts
and notes  receivable  and (iv)  proceeds of equity and debt  offerings  will be
available and used to fund working  capital and other operating needs during the
next twelve month period.

         The  Company  has  contracted  with its  licensees  to  provide  binder
materials  on a cost plus  basis  subject to certain  adjustments.  The  Company
expects to have  increased  profits  from binder  materials  during the last six
months of calendar  year 1998. As previously  mentioned,  there are  twenty-four
sythetic  fuel  facilities   currently   utilizing  the  Company's   proprietary
technology  that purchase  their binder  products from the Company.  The Company
expects  to earn  increased  gross  profits  from  the sale of  binder  to these
facilities in proportion to their  increased  production  and sales of synthetic
fuel.

         Under current  contracts,  the only facility owned by a third party for
which the Company has operational  responsibility is the Utah Plant. The Company
will earn a prescribed amount per ton for product produced at this facility. The
Company expects that there could be other plants for which the Company will have
operational  responsibility  and  for  which  it  will  earn  an  operation  and
maintenance fee. The Company does not expect that operation and maintenance fees
will constitute a material portion of its revenues in the future.

Existing Debt Arrangements

         In  November  1996,  the  Company   issued   convertible   subordinated
debentures in the principal amount of $1,000,000 to three persons not affiliated
with the Company.  The convertible  subordinated  debentures  accrue interest at
prime plus two percent (2%) with interest and principal  payable in full on June
30, 1998.  Through a separate  subscription  agreement,  the Company has granted
piggy-back  registration rights to the investors for Company common stock issued
upon conversion of the convertible subordinated debentures. On June 30, 1998 the
debentures  were  converted  as $11 per share  and the  Company  issued  107,174
restricted  shares of common stock which  reflected  the principal of $1,000,000
and accrued interest of $178,904.

         In December  1996, the Company  entered into a Debenture  Agreement and
Security Agreement with AJG, whereby the Company borrowed  $1,100,000,  pursuant
to a Convertible  Subordinated  Debenture  accruing interest at 6% per annum and
maturing  three years from its date of issuance (the  "Subordinated  Debenture")
and  $2,900,000  pursuant to Senior  Debentures  (the "Senior  Debenture").  The
Subordinated  Debenture  (including  accrued  interest) was converted to 140,642
shares of the  Company's  common  stock on May 5, 1997.  The Company has granted
piggy-back  and demand  registration  rights to AJG for the Company common stock
issued on conversion of the Subordinated  Debenture.  The Senior  Debentures are
collateralized by all real and personal  property  purchased by the Company with
the proceeds of the Senior Debenture. The proceeds of the Senior Debenture were

                                       21
<PAGE>

used to satisfy contractual  obligations of the Company, for working capital and
to purchase  equipment  used to construct  briquetting  facilities to be managed
and/or sold by the Company or affiliates of the Company.

         The Company  constructed a coal wash plant to provide washed coal fines
to the Utah Plant for the  manufacture  of  synthetic  fuel.  A portion of these
construction  costs were financed  through AJG. The total estimated cost for the
wash plant is approximately  $7.7 Million.  As of June 30, 1998, the Company had
borrowed  $4,325,433  under its arrangement with AJG. The financing is evidenced
by a promissory note executed and delivered by the Company to AJG and is secured
by the wash  plant.  The note  currently  bears  interest  at 6% per annum  with
principal  and  interest  due and  payable  two years from the time the debt was
incurred.  As additional  consideration  to AJG for the  financing,  the Company
agreed to grant warrants to purchase  Company common stock in an amount equal to
10% of the dollar  amount  financed,  with fifty  percent of the shares having a
purchase  price of $10 per  share  and  fifty  percent  of the  shares  having a
purchase price of $20 per share.  The warrants are  immediately  exercisable and
expire in two years.

         During the quarter  ended March 31, 1998,  the Company  entered into an
additional  agreement  with AJG to borrow up to $6.5 million at an interest rate
of 6% per annum to be used for construction of a briquetting facility located in
West  Virginia.  As of June 30, 1998 the Company had received  $6,680,000  under
this borrowing  agreement.  In July 1998, the Company repaid $180,000 under this
arrangement  to bring the net  borrowings to $6.5 million under this  agreement.
Amounts borrowed and accrued interest are due in full in February 2001.

         On March 20,  1997,  the Company  entered into a  Convertible  Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp  amended the Loan  Agreement.  Under the amended Loan
Agreement  terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down promissory note (the "Promissory Note") payable to PacifiCorp.  On March 3,
1998,  PacifiCorp  exercised its option to convert the full amount of $7,000,000
owing under the loan into  1,000,000  shares of common stock plus an  additional
27,000  shares  pursuant  to  anti-dilution  provisions  of the loan  agreement.
Pursuant  to the  Registration  Rights  Agreement,  dated as of March 20,  1997,
between the Company and  PacifiCorp,  PacifiCorp has been granted certain demand
and  piggy-back  registration  rights with  respect to shares of Company  common
stock that were acquired by PacifiCorp pursuant to the Loan Agreement.

         On  January 29,  1998  the Company  entered  into a loan  and  security
agreement  with Fun  Enterprises,  Pty Ltd.  ("Fun"),  a  current  holder of the
Company's Class B preferred stock,  relating to the development and construction
of  a  mobile,  skid-mounted  synthetic  fuel  production  facility  at  a  coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to  $5,800,000.  The interest  rate will be 12% per annum until August
31, 1998, and 15% per annum  thereafter until paid. Fun will also have the right
to receive certain  royalties after the facility is sold. As of the date of this
filing the Company has drawn $5,120,000 under this arrangement.  The loan is due
in full at the  earlier  of the sale of the  facility  or August 31,  1999.  The
Company has entered  into a letter of intent  with the eastern  coal  company to
provide  feedstock for the plant, to operate the plant, and to provide synthetic
fuel sales  services.  Construction  of the facility was completed prior to June
30, 1998.

         On March 17, 1998,  the Company  entered into a loan agreement in which
Trans Pacific Stores,  Ltd. ("TPS") agreed to loan the Company up to $4,000,000.
The loan is  secured  by future  earned  license  fees  payable  to the  Company
resulting from the synthetic fuel manufacturing  facilities  constructed by Pace
Carbon Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at
twelve  percent  (12%) per annum.  The  interest  rate is  adjusted  to thirteen
percent  (13%) on September  20, 1998 and to fourteen  percent (14%) on December
20, 1998.  Each time the interest  rate is adjusted,  a one percent (1%) renewal
fee of  $40,000  is due and  payable.  Interest  on the  unused  portion  of the
borrowing  will accrue  interest at one percent (1%) per annum until the loan is
paid in full.  The balance and interest is due in full before March 20, 1999. As
of June 30, 1998, $4,000,000 had been borrowed under this arrangement.

         On June 12, 1998, the Company entered into an additional loan agreement
with Trans  Pacific  Stores,  Ltd.  wherein TPS agreed to loan the Company up to
$4,000,000. Collateral for the first $2,200,000 of borrowings under this note is

                                       22
<PAGE>

a continuing interest in the promissory note as amended August 26, 1996 received
by the Company in connection  with the sale of certain  construction  companies;
collateral for borrowings  for the next  $1,800,000 is a continuing  interest in
future cash flows payable to the Company pursuant to an agreement  between Fluor
Corp/ A.T. Massey ("Massey") and the Company dated December 4, 1997. Interest on
the outstanding  principal  balance accrues at eighteen percent (18%) per annum.
On the four-month  anniversary of this note, the interest rate shall be adjusted
to twenty-two percent (22%) per annum, until the loan has been paid in full. All
principal and interest is due and payable on or before  twelve months  following
execution  of this note.  TPS could also be granted  warrants  to purchase up to
100,000  shares of restricted  common stock of the Company In an amount equal to
$100,000  multiplied by the quotient of the  outstanding  borrowings  divided by
$4,000,000,  at an  exercise  price  equal  to  the  closing  bid  price  on the
four-month  anniversary.  Warrants granted,  if any, may be exercised within two
years of the date of issuance. As of June 30, 1998, $2,000,000 had been borrowed
under  this  arrangement.  A  member  of the  Company's  Board of  Directors  is
affiliated with TPS.

         On May 5, 1998, the Company  entered into an Asset  Purchase  Agreement
("Agreement")  with  Mountaineer  Synfuel,  L.L.C.("Mountaineer"),  wherein  the
Company agreed to sell a synthetic  fuel facility  located in West Virginia upon
the  occurrence of certain  future events.  In connection  with this  Agreement,
Mountaineer  agreed  to  loan  Covol  up  to  $8,500,000  to  be  used  for  the
construction  and working capital  requirements of the facility.  Amounts loaned
are to be repaid upon the earlier of the Closing Date of the purchase or January
1, 1999. As of June 30, 1998, $8,250,000 had been received under this Agreement,
of which $8,250 came from the Company as the owner of a .1% membership  interest
in Mountaineer.

                                       23
<PAGE>

Forward Looking Statements

         Statements  regarding the Company's  expectations  as to the financing,
development and construction of facilities utilizing its Briquetting Technology,
the  receipt  of  licensing  fees,  operating  revenues  and  other  information
presented in this Quarterly  Report on Form 10-Q that are not purely  historical
by nature,  including those  statements  regarding the Company's future business
plans, the construction  and estimated  completion of facilities,  the estimated
capacity of facilities, the availability of coal fines, the marketability of the
synthetic fuel and other briquettes and the financial  viability of the proposed
facilities,  constitute  forward  looking  statements  within the meaning of the
Private Securities  Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable  assumptions  within the bounds of
its  knowledge of its business and  operations,  there can be no assurance  that
actual results will not differ materially from its expectations.  In addition to
matters  affecting  the  Company's  industry or the coal industry or the economy
generally,  factors which could cause actual results to differ from expectations
set forth in the  above-identified  forward looking statements include,  but are
not limited to, the following:

       (i)   The  commercial   success  of  the  Briquetting   Technology.
       (ii)  Procurement of necessary equipment to operate facilities.
       (iii) Securing of necessary sites and raw materials for facilities to be
             operated.
       (iv)  Qualification  of synthetic  fuel  facilities for tax credits under
             Section  29 of the  Internal  Revenue  Code  of  1996,  as  amended
             ("Section 29")
       (v)   Ability to obtain needed additional  capital on terms acceptable to
             the Company.
       (vi)  Changes  in  governmental  regulation  or  failure  to comply  with
             existing  regulation  which may result in operational  shutdowns of
             its facilities.
       (vii)  The  availability  of tax  credits  under  Section  29.  (viii)The
       commercial feasibility of the Briquetting Technology upon the
             expiration of Section 29 tax credits.
       (ix)  Ability to meet financial  commitments  under existing  contractual
             arrangements.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

              Not applicable.


                           PART II- OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

       The Company entered into a letter of intent with Innovative  Technologies
("Innovative") in July of 1995 to apply the Company's Briquetting  Technology to
certain  metallic ores supplied by Innovative.  The Company  conducted  numerous
tests of the ore through the fall of 1995,  and concluded  from the results that
the venture was not economically viable. Accordingly, final agreement to process
the ore was never reached. On March 4, 1997, Innovative Holding Company, Inc., a
California corporation, and ORO Limited, a California limited partnership, filed
a civil complaint against the Company alleging breach of the letter of intent in
the amount of $500,000  plus  damages.  The  complaint was filed in the Superior
Court of California,  County of Orange (Case No. 776083).  The case is currently
in trial and the Company  believes  that it will be  successful in defending the
suit.

                                       24
<PAGE>


ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS


       Recent Sales of Unregistered Securities

       The following sets forth all securities  issued by the Company within the
past fiscal quarter without  registering the securities under the Securities Act
of 1933, as amended.  No  underwriters  were involved in any stock issuances nor
were any commissions or similar fees paid in connection therewith.  However, the
Company  did pay  finders  fees in the  form  of  cash,  stock  or  warrants  in
connection with various securities issued.

       The  issuance  of  qualified  options is  required  to be based on market
value.  Accordingly,  the exercise price is set based on the market price of the
Company's common stock, even though the options convert into restricted stock.

       The Company  believes  that the  following  issuances of shares of common
stock or securities for  contingency  issuable common stock were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the  exemption  set  forth in  Section  4(2) or 4(6)  thereof  or  Regulation  D
promulgated thereunder and the certificate for each security bears a restrictive
legend.

          In March 1998, PacifiCorp exercised their option to convert $7,000,000
owing  including  interest  under a convertible  loan into  1,000,000  shares of
common stock. In April 1998, an additional 27,000 shares were issued pursuant to
certain antidilution provisions under the loan agreement.

         In April and May of 1998,  the Company  issued 28,157 shares and 64,200
shares,  respectively,  of  common  stock to  certain  accredited  investors  in
exercise of warrants at $8.00 per share. The consideration was paid in cash. The
warrants were initially  granted in connection  with units  privately  placed in
September and October of 1997. The remaining 23,200 shares  underlying  warrants
expired as of April 30, 1998.

         In April 1998, a consultant of the Company exercised options previously
granted at $1.50 per shares.  The Company  issued 16,400 shares of the Company's
common stock in exercise of these options. The consideration was paid in cash.

         In May 1998,  the  Company  issued  55,000  shares  of common  stock to
Michael  Midgley,  a former  officer of the  Company,  in exercise of options at
$1.50 per share. The consideration was paid in cash.

         In May 1993,  the Company  granted  options to acquire 50,000 shares of
common stock at an exercise price of $12.63 per share to Steven  Stewart,  chief
financial  officer for the Company,  as compensation.  The shares vest over a 60
month period on a pro-rata basis.

         In June 1998, the Company  granted  options to acquire 72,250 shares of
common  stock at an exercise  price of $13.56 per share to certain  directors of
the Company as director compensation. The shares are fully vested.

         In June 1998, the Company  issued 2,500 shares of the Company's  common
stock  to  Stan  Kimball  in  exercise  of  options  at  $1.50  per  share.  The
consideration was paid in cash.

                                       25
<PAGE>

         In June 1998, the Company  granted  options to acquire 25,000 shares of
common stock at $7.25 per share to Combustion  Resources,  LLC in  consideration
for past  services  performed.  The shares are fully vested and expired 10 years
from the date of grant.

         In June 1998, Mr.  Douglas M. Kinney and Mr. Gordon L. Deane  exercised
their  options to convert  $1,000,000  owing  under a  convertible  subordinated
debenture  into shares of common  stock at $11.00 per share.  As of June 30,1998
$178,904 of interest had accrued.  On July 3, 1998 the company issued 107,174 in
connection with the conversion of these debentures.

         In June 1998, the Company  granted  incentive  stock options to acquire
587,000  shares of  common  stock of the  Company  at $12.97  per  share,  to 12
employees of the company.

          The Company believes that the following  issuances of shares of common
stock and other securities were exempt from the registration requirements of the
Securities  Act of 1933,  as amended,  pursuant to the exemption set forth under
Regulation S thereof:

         In April 1998,  and in reliance on Regulation S, the Company issued 160
shares of  common  stock to an  investor  in  connection  with the  exercise  of
warrants at $7.25 per share.  The warrants were initially  granted in connection
with the sale of units in May and July of 1997.  The  consideration  was paid in
cash.

                                       26
<PAGE>


ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

                  None.

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

                  None.

ITEM 5.           OTHER INFORMATION

                  None.

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

                  (a)  Exhibits

                  Those  exhibits  previously  filed  with  the  Securities  and
                  Exchange Commission as required by Item 601 of Regulation S-K,
                  are  incorporated  herein by reference in accordance  with the
                  provisions of Rule 12b-32.

             10.52*        Technology License and Binder Purchase Agreement
                           between Mountaineer Synfuel, L.L.C., Licensee, and
                           Covol Technologies, Inc., Licensor.

             10.52.1       Asset Purchase Agreement between Mountaineer Synfuel,
                           L.L.C. as Purchaser and Covol Technologies, Inc. as
                           Seller dated May 5, 1998.

             10.52.2       Promissory Note between Covol Technologies, Inc. and
                           Mountaineer Synfuel, L.L.C. dated May 5, 1998.

             10.52.3       Deed of Ground Lease between Upshur Property, Inc.
                           (Landlord) and Covol Technologies, Inc. (Tenant)
                           dated May 5, 1998.

             Exhibit 27.1  Financial Data Schedule

            *    Exhibit contains  confidential  material which has been omitted
                 pursuant  to a  Confidential  Treatment  Request.  The  omitted
                 information  has been filed  separately with the Securities and
                 Exchange Commission.


            (b)  Reports on Form 8-K

                 NONE 


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<PAGE>


                                   SIGNATURE


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



Date: August 14, 1998


                                    COVOL TECHNOLOGIES, INC.



                                   By: /s/ Brent M. Cook
                                      ------------------------------------------
                                      Brent M. Cook, Chief Executive Officer and
                                        Principal Executive Officer


                                   By: /s/ Steven G. Stewart
                                      ------------------------------------------
                                      Steven G. Stewart, Chief Financial Officer
                                       and Principal Financial Officer


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