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

                                    FORM 10-Q


[X]      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                  For the quarterly period ended June 30, 1999

                                       or

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                 For the transition period from ______ to ______

                         Commission file number 0-27808

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

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

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

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

                                 Not applicable
              (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 ____

The number of shares  outstanding of the Registrant's  common stock as of August
9, 1999 was 12,722,492.

<PAGE>

                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                        Page No.
PART I - FINANCIAL INFORMATION

     ITEM 1. CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
             Consolidated Balance Sheets - As of September 30, 1998
               and June 30, 1999............................................  3
             Consolidated Statements of Operations - For the three
               months ended June 30, 1998 and 1999 and the nine months
               ended June 30, 1998 and 1999.................................  5
             Consolidated Statement of Changes in Stockholders' Equity -
               For the nine months ended June 30, 1999......................  6
             Consolidated Statements of Cash Flows - For the nine
               months ended June 30, 1998 and 1999..........................  7
             Notes to Consolidated Financial Statements.....................  8

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS...................................... 16

PART II - OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS.............................................. 24

     ITEM 2. CHANGES IN SECURITIES.......................................... 24

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 25

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 25

     ITEM 5. OTHER INFORMATION.............................................. 25

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 25

SIGNATURES.................................................................. 26

Certain statements 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 current  expectations.  For a discussion
of certain  of the  factors  that  could  cause  actual  results to differ  from
expectations,  please see the information  set forth under the caption  entitled
"Forward Looking Statements" in PART I, ITEM 2 hereof. There can be no assurance
that  Covol's  results of  operations  will not be  adversely  affected  by such
factors.  Covol  undertakes  no  obligation  to revise or  publicly  release the
results  of any  revision  to  these  forward-looking  statements.  Readers  are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's opinion only as of the date hereof.

                                       2
<PAGE>
<TABLE>
<CAPTION>

ITEM 1.   CONSOLIDATED FINANCIAL INFORMATION (Unaudited)


                                          COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                                 CONSOLIDATED BALANCE SHEETS
                                                         (Unaudited)

                                                                                             September 30,       June 30,
(thousands of dollars)                                                                           1998              1999
------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS

Current assets:
<S>                                                                                         <C>              <C>
     Cash and cash equivalents                                                              $           727  $          1,932
     Receivables                                                                                      2,879             2,200
     Due from related party                                                                           1,012             2,271
     Inventories                                                                                      1,645             1,683
     Advances on inventories, current                                                                 2,522               935
     Facilities held for sale                                                                        28,405            28,542
     Prepaid expenses and other current assets                                                          682               439
                                                                                            ---------------- -----------------
            Total current assets                                                                     37,872            38,002
                                                                                            ---------------- -----------------

Property, plant and equipment, net of accumulated depreciation                                       14,986            14,402
                                                                                            ---------------- -----------------

Other assets:
     Restricted investments                                                                             748               717
     Advances on inventories, non-current                                                                --             2,742
     Facility-dependent notes and accrued interest receivable                                         7,646             8,054
     Facility transferred under note receivable arrangement                                           3,166             2,774
     Intangible assets, net of accumulated amortization                                               3,118             3,875
     Deposits and other assets                                                                          525             1,809
                                                                                            ---------------- -----------------
            Total other assets                                                                       15,203            19,971
                                                                                            ---------------- -----------------

Total assets                                                                                $        68,061  $         72,375
                                                                                            ================ =================
</TABLE>

                                   (continued)

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

                                       3
<PAGE>
<TABLE>
<CAPTION>

                                         COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED BALANCE SHEETS, continued
                                                        (Unaudited)
                                                                                             September 30,      June 30,
(thousands of dollars and shares)                                                                 1998            1999
-------------------------------------------------------------------------------------------- --------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                                         <C>              <C>
     Accounts payable                                                                       $         3,036  $         1,265
     Due to related party                                                                             1,609            2,377
     Accrued liabilities                                                                              2,858            3,023
     Notes payable, current                                                                          22,049           20,359
                                                                                            ---------------- -----------------
            Total current liabilities                                                                29,552           27,024
                                                                                            ---------------- -----------------

Long-term liabilities:
     Notes payable, non-current                                                                      13,930           22,695
     Accrued interest payable, non-current                                                              566              255
     Notes and accrued interest payable - related parties, non-current                                  147               --
     Deferred revenues from advance license fee                                                       1,155            1,050
     Deferred compensation                                                                              236              205
                                                                                            ---------------- -----------------
            Total long-term liabilities                                                              16,034           24,205
                                                                                            ---------------- -----------------
            Total liabilities                                                                        45,586           51,229
                                                                                            ---------------- -----------------

Minority interest in consolidated subsidiaries                                                          507              109
                                                                                            ---------------- -----------------

Commitments and contingencies (Note 6)

Redeemable convertible  preferred stock, $.001 par value, issued and outstanding
  0 shares at September  30, 1998 and 60 shares at June 30, 1999  (aggregate
  liquidation preference of $7,623 at June 30, 1999)                                                     --            4,332
                                                                                            ---------------- -----------------

Stockholders' equity:
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
       issued and  outstanding  316 shares at September 30, 1998 and 18 shares at
       June 30, 1999 (aggregate liquidation preference of $4,170 at June 30, 1999)                        1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and outstanding
       11,272 shares at September 30, 1998 and 12,586 shares at June 30, 1999                            11               12
     Capital in excess of par value                                                                  69,284           78,091
     Accumulated deficit                                                                            (35,780)         (51,674)
     Notes and interest receivable - related parties, from issuance of, or collateralized
       by, common stock, net of allowance                                                            (7,773)          (7,024)
     Deferred compensation from stock options                                                        (3,775)          (2,701)
                                                                                            ---------------- -----------------
            Total stockholders' equity                                                               21,968           16,705
                                                                                            ---------------- -----------------

Total liabilities and stockholders' equity                                                  $        68,061  $        72,375
                                                                                            ================ ================
</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 Ended June 30,         Nine Months Ended June 30,
(thousands of dollars, except per-share amounts)                    1998             1999             1998             1999
-------------------------------------------------------------- ---------------- ---------------- ---------------- ---------------

Revenues:
<S>                                                            <C>              <C>              <C>              <C>
     License fees                                              $         3,185  $           661  $         7,841  $        1,565
     Synthetic fuel sales                                                   --              242                5             242
     Binder sales                                                           --              409               --           1,365
     Binder and coal fine sales - related party                          1,248               50            3,243             233
     Binder plant sales                                                  1,298               --            1,298              --
     Other                                                                   4               23               70             122
                                                               ---------------- ---------------- ---------------- ---------------
          Total revenues                                                 5,735            1,385           12,457           3,527
                                                               ---------------- ---------------- ---------------- ---------------

Operating costs and expenses:
     Cost of coal briquetting operations                                 1,409            2,866            2,457           8,687
     Cost of binder                                                         --              291               --             941
     Cost of binder and coal fines - related party                       1,056                7            3,073              42
     Cost of binder plants                                               1,095               --            1,095              --
     Asset impairment charge                                                --              556               --             556
     Selling, general and administrative                                 1,111            1,338            3,003           3,500
     Research and development                                               81              154              309             497
     Compensation expense from stock options, stock
          warrants and issuance of common stock                            286              749              732           1,074
                                                               ---------------- ---------------- ---------------- ---------------
        Total operating costs and expenses                               5,038            5,961           10,669          15,297
                                                               ---------------- ---------------- ---------------- ---------------

Operating income (loss)                                                    697           (4,576)           1,788         (11,770)
                                                               ---------------- ---------------- ---------------- ---------------

Other income (expense):
     Interest income                                                       224              308              363           1,298
     Interest expense                                                       --           (1,981)          (2,292)         (4,394)
     Minority interest in net losses of consolidated
        subsidiaries                                                       183               --              321              --
     Write-up (write-down) of notes receivable - related
        parties,  collateralized by common stock                           532               --            1,095           (749)
     Other                                                                 (38)             (26)              71           (102)
                                                               ---------------- ---------------- ---------------- ---------------
          Total other income (expense)                                     901           (1,699)            (442)         (3,947)
                                                               ---------------- ---------------- ---------------- ---------------

Net income (loss)                                              $         1,598  $        (6,275) $         1,346  $      (15,717)
                                                               ================ ================ ================ ===============

Basic income (loss) per common share                           $           .15  $          (.54) $           .11  $        (1.33)
                                                               ================ ================ ================ ===============

Diluted income (loss) per common share                         $           .12  $          (.54) $           .09  $        (1.33)
                                                               ================ ================ ================ ===============
</TABLE>

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

                                       5
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     For the Nine Months Ended June 30, 1999
                                   (Unaudited)

                                                                                                         Notes and
                                                                                                         interest
                                                                                                        receivable
                                                                                                         -related
                                                                                                        parties, from
                       Convertible Preferred      Common Stock                                           issuance of,
                              Stock                                                                     or collater-     Deferred
                      -----------------------------------------------                                     alized       compensation
(thousands of dollars                                                 Capital in excess   Accumulated    by, common     from stock
 and shares)            Shares     Amount       Shares        Amount    of par value        deficit         stock          options
------------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>          <C>        <C>            <C>         <C>              <C>             <C>            <C>
Balances
at September 30, 1998     316        $1        11,272           $11        $69,284         $(35,780)       $(7,773)       $(3,775)

Common stock
issued to purchase
minority interests
in subsidiaries                                    70            --            519

Common stock
issued for cash,
including exercise
of stock options                                  776             1          3,774

Value of common
stock warrants
issued under terms
of existing debt
agreement                                          --            --            247

Common stock
issued for
rights to
technology                                         60            --            375

Common stock
issued on
conversion of
preferred stock
and in payment
of accrued but
undeclared dividends     (299)       --           422            --            177             (177)

Return of
previously issued
common stock by
a director                                        (14)           --             --

Value of common
stock options
issued in connection
with debt financing                                --            --            175

Preferred stock
issued for cash,
net of offering costs       1        --                                        899

Value of common
stock warrants
issued in connection
with redeemable
convertible preferred
stock and
convertible debt                                                             2,435

Value of common
stock warrants
issued in connection
with extension of
note payable due date                              --            --            206

Write-down of
notes receivable -
related parties                                                                                                749

Amortization of
deferred compensation
from stock options                                                                                                          1,074

Net loss for the
nine months ended
June 30, 1999                                                                               (15,717)
                      --------------------------------------------------------------------------------------------------------------
Balances at
June 30, 1999              18        $1        12,586           $12        $78,091         $(51,674)       $(7,024)       $(2,701)
                      ==============================================================================================================
</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 Ended June 30,
     (thousands of dollars)                                                                             1998            1999
-------------------------------------------------------------------------------------------------   --------------  ------------
<S>                                                                                                 <C>             <C>
     Cash flows from operating activities:
      Net income (loss)                                                                             $        1,346  $     (15,717)
      Adjustments to reconcile net income (loss) to net cash used in operating activities:
        Depreciation and amortization                                                                          256          1,432
        Write-down (write-up) of notes receivable - related parties                                         (1,095)           749
        Interest expense related to amortization of debt discount and debt issuance costs                    2,266          1,160
        Amortization of deferred compensation from stock options                                               732          1,074
        Minority interest in net losses of consolidated subsidiaries                                          (321)            --
        Loss (gain) on disposition of equipment                                                                (26)           153
        Asset impairment charge                                                                                 --            556
        Decrease from changes in assets and liabilities, net of effects from investing
           and financing activities                                                                         (4,277)        (3,795)

                                                                                                    --------------  -------------
   Net cash used in operating activities                                                                    (1,119)       (14,388)
                                                                                                    --------------  -------------

   Cash flows from investing activities:
        Purchase of property, plant and equipment and facilities held for sale                             (33,716)          (685)
        Proceeds from sale of equipment                                                                         --            170
        Purchase of rights to technology                                                                        --           (127)
        Issuance of notes receivable                                                                        (1,257)            --
        Proceeds from facility transferred under note receivable arrangement                                   288            392
        Deposits collateralizing letters of credit                                                            (588)            --
        Proceeds from decrease in restricted investment                                                         --             50
                                                                                                    --------------  -------------
   Net cash used in investing activities                                                                   (35,273)          (200)
                                                                                                    --------------  -------------

   Cash flows from financing activities:
        Proceeds from issuance of notes payable and warrants                                                32,570         10,453
        Payments on notes payable                                                                               (6)        (4,655)
        Payments on notes payable - related parties                                                           (342)          (147)
        Proceeds from issuance of preferred stock and warrants, net                                             90          6,367
        Proceeds from issuance of common stock, net                                                          1,761          3,775
        Proceeds from receivable - stock subscriptions                                                         577             --
        Proceeds from notes receivable - related parties, collateralized by common stock                       314             --
                                                                                                    --------------  -------------
   Net cash provided by financing activities                                                                34,964         15,793
                                                                                                    --------------  -------------

   Net increase (decrease) in cash and cash equivalents                                                     (1,428)         1,205

   Total cash and cash equivalents, beginning of period                                                      4,780            727
                                                                                                    --------------  -------------

   Total cash and cash equivalents, end of period                                                   $        3,352  $       1,932
                                                                                                    ==============  =============

   Supplemental schedule of non-cash investing and financing activities:
        Common stock issued to purchase minority interests in subsidiaries                          $           --  $         519
        Common stock issued on conversion of preferred stock and undeclared dividends                           --          2,444
        Common stock issued for rights to technology                                                            --            375
        Notes payable issued for rights to technology                                                           --            426
        Property, plant and equipment acquired through reduction of accounts receivable                         --            413
        Notes payable issued for equipment                                                                     702            424
        Common stock issued on conversion of notes payable and related accrued interest                      8,179             --
        Common stock issued for notes receivable - related parties                                              45             --
        Notes receivable issued for sale of synthetic fuel facility                                          6,500             --
        Notes payable and accrued interest that were refinanced                                              2,040             --
        Preferred stock dividends not accrued or paid                                                          233            284
</TABLE>
                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                        7
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


1.   Nature of Operations and Basis of Presentation

     Covol Technologies, Inc. and Subsidiaries' ("Covol") primary business is to
     commercialize  its  binder  technologies  which are used to  recycle  waste
     by-products  from the coal, steel and other industries into marketable fuel
     and resources. Through June 30, 1998, Covol's focus was on the construction
     of facilities and the licensing of its binder technologies to entities that
     constructed   facilities  that  convert  coal  fines  into  synthetic  fuel
     briquettes.  At June 30, 1999,  Covol and its licensees  were  operating 28
     facilities in ten states at various  levels of  production,  including four
     facilities which are using a technology that Covol acquired during the past
     nine months.  Covol is actively seeking to sell its four owned  facilities.
     Although there can be no assurance that the facilities will be sold,  Covol
     has  entered  into a  non-binding  letter of intent  for the sale of one of
     these facilities.  Covol has entered into a separate  non-binding letter of
     intent to sell Covol's  synthetic  fuel  business,  including the remaining
     three  Covol-owned   facilities  and  royalty  interests  from  third-party
     licensees.  Covol has no current  plans to construct  additional  synthetic
     fuel facilities.

     There are 24 synthetic fuel plants that utilize Covol's patented technology
     and from which Covol intends to earn license fees.  These facilities do not
     presently  operate at levels  needed to  generate  significant  revenues to
     Covol. Improved operations at each of these plants depend on the ability of
     the plant owner to produce synthetic fuel that meets market  specifications
     in order  for the  plant  owner to  market  the  synthetic  fuel.  Covol is
     assisting  the plant  owners in their  efforts to overcome  production  and
     marketing problems. Covol anticipates that earned license fees or royalties
     from the  production  and sale of synthetic  fuel will continue to increase
     during 1999 and in 2000. As production levels increase, sales of the binder
     materials   by  Covol  to  its   licensees   are   expected   to   increase
     proportionately.  Funds  received  by Covol from these  activities  are not
     expected to be  sufficient to cover  Covol's  operating  costs and expenses
     until early 2000.

     In order for  operating  activities  to produce  significant  positive cash
     flows, Covol and its licensees must successfully  address certain operating
     issues and marketing  difficulties.  These  problems  have delayed  Covol's
     expected  growth in license fees,  and have resulted in lower than expected
     cash flows and higher than expected capital requirements.  Operating issues
     which  must  be  addressed  include,  but  are not  limited  to,  feedstock
     availability,  moisture content, Btu content, correct application of binder
     formulation,  operability of equipment,  product durability,  resistance to
     water  absorption and overall costs of  operations,  which in many cases to
     date have  resulted in unit costs in excess of synthetic  fuel sale prices.
     Marketing  difficulties which must be addressed relate to market acceptance
     of products  manufactured using our technology.  Industrial coal users must
     be satisfied that the synthetic fuel is a suitable  substitute for standard
     coal products.  Moisture content,  hardness,  special handling requirements
     and other  characteristics  of the  synthetic  fuel  product may affect its
     marketability  and its sales  price.  Many  industrial  coal users are also
     limited in the amount of synthetic  fuel product they can purchase  from us
     and our  licensees  because they have  committed to purchase a  substantial
     portion of their coal requirements through long-term contracts. Reliance on
     spot markets and the overall  downward  trend in coal prices have generally
     produced lower sale prices  compared to long-term coal supply  contracts in
     the utility  industry.  To date,  our owned  facilities  and licensees have
     secured contracts for the sale of only a portion of their  production.  The
     suitability  of  synthetic  fuel  as a coal  substitute,  particularly  the
     quality  characteristics  of synthetic fuel, and the traditional  long-term
     supply contract  practices of fuel buying in the utility industry have made
     the  identification  of  purchasers  of  synthetic  fuel  difficult.  Covol
     believes  that  once  initial  market  resistance  is  overcome,  long-term
     contracts  will be secured for the synthetic  fuel,  and that Covol and its
     licensees  will be able to market all  synthetic  fuel  produced  at prices
     similar to coal.

     Covol's  short-term  existence  depends on the  procurement  of  additional
     financing and the extensions of existing debt  repayment  terms in order to
     enable it to maintain  adequate  liquidity until it can sell its facilities
     held for sale or consummate the transactions contemplated by the letters of
     intent.

                                       8
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

     During  November 1998,  Covol issued common stock and common stock warrants
     for total net proceeds of  approximately  $3,730,000.  During January 1999,
     Covol  issued  convertible  preferred  stock  and  warrants  for  total net
     proceeds  of  approximately  $900,000.  During  March  1999,  Covol  issued
     convertible secured debt, convertible redeemable preferred stock and common
     stock warrants for total net proceeds of approximately  $14,800,000.  Covol
     is currently in  discussions  with creditors to whom debt is owed in August
     1999 and is also in discussions with several  potential lenders with regard
     to its short-term  financing needs. Covol is using all available  resources
     to remain solvent and will continue to pursue the extension of due dates of
     debt, additional  financing,  the sale of its facilities held for sale, and
     consummation  of the  transactions  contemplated  in the letters of intent.
     Covol  believes it will be able to extend the  repayment  terms of its debt
     and that the funds raised in additional financings and excess proceeds from
     the sale of facilities will be sufficient to fund Covol's  operations until
     its  operating  activities  begin  producing  positive  cash flow or it can
     consummate the transactions contemplated by the letters of intent.

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with the rules and regulations of the Securities and
     Exchange  Commission for quarterly  reports on Form 10-Q. In the opinion of
     management,  all adjustments  considered  necessary for a fair presentation
     have been  included.  All  adjustments  except for those  described  in the
     following  two  paragraphs  consist of normal  recurring  adjustments.  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 consolidated financial
     statements and notes thereto included in Covol's Annual Report on Form 10-K
     for the year ended September 30, 1998 and in Covol's  Quarterly  Reports on
     Form 10-Q for the quarters ended December 31, 1998 and March 31, 1999.

     During  the three  months  ended  June 30,  1999,  Covol  terminated  three
     employees to whom  compensatory  stock options were granted in prior years.
     These stock options were not forfeited upon  termination.  During the three
     months ended June 30, 1999,  total  amortization  of deferred  compensation
     from stock options approximated  $749,000, of which approximately  $600,000
     was for the write off of the unamortized  deferred  compensation related to
     these individuals.

     In May 1995,  Covol entered into an agreement  with Geneva Steel Company to
     build and operate a commercial  briquetting  facility.  The facility  never
     reached commercial operating levels, but was held for other uses, including
     potential relocation to another site for use in the production of synthetic
     fuel or in other  applications.  In early  1999,  Geneva  filed a voluntary
     petition for relief under Chapter 11 of the United States  Bankruptcy  Code
     due to a lack of sufficient liquidity. Primarily as a result of this event,
     Covol moved a substantial portion of the equipment  comprising the facility
     from the  Geneva  site to  another  location  where  it is being  used in a
     different  application of Covol's technology.  Certain assets at the Geneva
     site, primarily consisting of leasehold  improvements on the property where
     the facility  was  located,  were  abandoned.  The carrying  value of these
     assets, totaling approximately $556,000, was written off during the quarter
     ended June 30, 1999.

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

                                       9
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------


     Restatements and Reclassifications

     In accordance  with  generally  accepted  accounting  principles  and after
     discussion  with the staff of the  Securities  and Exchange  Commission  in
     August  1999,  the  Company  has  restated  its  1998  and  1999  financial
     statements for the following items:

        o     To amortize a $1.4 million advance license fee paid by Coaltech on
              a  straight-line  basis over the  contractual  term of the license
              agreement  which is through  2007.  This fee had  previously  been
              deferred  because Covol deemed the sale of the Utah facility,  the
              license  agreement,  and the other  related  agreements  to be one
              single  integrated  transaction,  and  because  the  agreement  to
              purchase and remarket  Coaltech's  production  at cost plus $1 per
              ton was currently resulting in losses which effectively eliminated
              the normal profit margin associated with binder sales to Coaltech.
              The   de-recognition  of  the  sale  discussed  in  the  following
              paragraph effectively separated these transactions.

        o     To de-recognize  the sale of the Utah facility in 1997 and account
              for this  transaction  under SEC guidelines  for  divestiture of a
              business  operation,  as outlined under Staff Accounting  Bulletin
              (SAB) Topic 5:E. The note receivable  related to this  transaction
              has  been  classified  as  a  facility   transferred   under  note
              receivable  arrangement  and  the  loss  on  sale  ($582,000)  was
              reversed. All note payments received,  including interest,  reduce
              the carrying amount of the recorded asset.

        o     To reverse depreciation expense recorded on assets not in use.

     The combined effect of all of the above items is to decrease net income for
     the nine months ended June 30, 1998 by $83,000 and to increase the net loss
     for the nine months ended June 30, 1999 by $201,000.

     In addition to the above  restatements,  certain  prior year  amounts  were
     reclassified  to  conform  with  the  current  year's   presentation.   The
     reclassifications had no effect on net loss or total assets.

     Covol has  currently  filed two 1933 Act  filings on Form S-3  Registration
     Statements,  which are currently  being  reviewed by the SEC. In connection
     with that  review,  the SEC has  raised  questions  which  could  result in
     further restatements.

2.   Change in Carrying Value of Note Receivable

     During the nine months ended June 30, 1999,  Covol  increased the allowance
     on  the  $5,000,000  face  value  note  receivable  from a  stockholder  by
     approximately  $749,000,  resulting in an adjusted  carrying  value for the
     note of  $860,000  as of June  30,  1999.  None of this  adjustment  in the
     allowance was  attributable to the three-month  period ended June 30, 1999.
     During the three and nine months ended June 30, 1998,  Covol  decreased the
     allowance by  approximately  $532,000  and  $1,095,000,  respectively.  The
     changes in the  allowance  were based solely on changes in the market value
     of Covol's common stock and common stock options held as collateral for the
     note  receivable.  The allowance is subject to future  fluctuations  in the
     value of Covol's common stock.  During the nine months ended June 30, 1999,
     Covol received payments totaling $515,000 from the note holder. This amount
     represented the scheduled payments as required under the note.

                                       10
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

<TABLE>
<CAPTION>
3.   Notes Payable

     Notes payable consist of the following:

                                                                                                September 30,        June 30,
   (thousands of dollars)                                                                            1998              1999
  -------------------------------------------------------------------------------------------- ----------------- ---------------
<S>                                                                                              <C>                <C>
   Note payable to a corporation,  bearing interest at 15%,  collateralized by a
   synthetic  fuel  facility  in  Pennsylvania,  held for sale,  with all unpaid
   principal  and  interest  due at the  earlier of the sale of the  facility or
   August 31, 1999.                                                                                 $5,800            $5,800

   Note  payable to a  corporation  bearing  interest at prime (8.0% at June 30,
   1999) plus 2%, collateralized by plant and equipment,  principal and interest
   due December 1999.                                                                                2,900             2,900

   Note payable to the same corporation  referred to in the preceding paragraph,
   bearing   interest  at  6%,   principal   and  interest  due  January   2000,
   collateralized by a coal wash plant in Utah.                                                      4,263             4,301

   Notes  payable  to the same  corporation  referred  to in the  preceding  two
   paragraphs, bearing interest at 6%. 50% of accrued interest due February 2000
   with   remaining   accrued   interest  and  principal   due  February   2001.
   Collateralized by a synthetic fuel facility in West Virginia,  held for sale,
   and license fees payable to Covol from the  production  and sale of synthetic
   fuel from four synthetic fuel facilities.                                                         6,680             6,500

   Note  payable  to a  limited  liability  company  bearing  interest  at  10%,
   collateralized by a synthetic fuel facility in West Virginia,  held for sale,
   and license fees payable to Covol from the  production  and sale of synthetic
   fuel from two  synthetic  fuel  facilities.  Beginning  July 1999 through May
   2000,  monthly  payments of $350 are required,  with all unpaid principal and
   interest due June 2000. Alternatively, if Covol sells the facility before the
   loan  repayment  date,  Covol must repay the loan from sale  proceeds.                            8,242             9,191

   Convertible  secured  note  payable  to an  investment  company  issued  at a
   discount,  bearing a stated interest rate of 2.5% on the $20,000 face amount.
   The note is due March 2004,  but is expected to be redeemed or converted into
   common stock by the note holder prior to maturity if not redeemed  earlier by
   Covol.  Interest is payable semiannually on January 1 and July 1. The note is
   collateralized  by license fees payable to Covol from the production and sale
   of synthetic fuel from four synthetic fuel facilities located in Virginia and
   West Virginia.                                                                                       --             9,503

   Note payable to a corporation,  bearing interest at 14%,  collateralized by a
   promissory  note  receivable and by certain future license fees receivable by
   Covol.  Interest is payable  monthly and $1,000 of  principal is due December
   1999 and $3,000 of principal is due April 2000.                                                   4,000             4,000

   Note payable to the same corporation  referred to in the preceding paragraph,
   bearing interest at 14%, paid in March 1999.                                                      4,000                --

   Other                                                                                                94               859
                                                                                               ------------       -----------
                                                                                                    35,979            43,054
       Less: current portion                                                                        22,049            20,359
                                                                                               ============       ===========
       Total non-current                                                                           $13,930           $22,695
                                                                                               ============       ===========
</TABLE>

                                       11
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

   Substantially  all of Covol's  property,  plant and equipment and  facilities
   held for sale are  collateral  for the notes  payable.  The weighted  average
   interest  rate on notes  payable was 8.5% at September  30, 1998 and 15.9% at
   June 30, 1999.

   Interest Costs

   During the nine months ended June 30, 1999,  Covol  incurred  total  interest
   cost of  approximately  $4,394,000  (including  approximately  $1,160,000  of
   amortization  of debt  discount and debt issuance  costs),  none of which was
   capitalized. During the nine months ended June 30, 1998, Covol incurred total
   interest cost of approximately $3,682,000 (including approximately $2,266,000
   of non-cash  interest expense resulting from issuance of convertible debt and
   warrants at a discount), of which approximately $1,390,000 was capitalized.

4.   Basic and Diluted Loss per Share
<TABLE>
<CAPTION>
                                                                  Three Months Ended               Nine Months Ended
                                                                       June 30,                        June 30,
  (thousands of dollars and shares, except per-share data)         1998          1999            1998             1999
  ---------------------------------------------------------- -------------- --------------- ---------------- ---------------
  Numerator:
<S>                                                                 <C>           <C>               <C>            <C>
      Net income (loss)                                             $1,598        $(6,275)          $1,346         $(15,717)
      Preferred stock dividends (undeclared)                           (85)          (170)            (279)            (307)
      Imputed preferred stock dividends                                 --           (313)              --             (353)
                                                             ============== =============== ================ ===============
      Net income (loss) attributable to common
        stockholders                                                $1,513        $(6,758)          $1,067         $(16,377)
                                                             ============== =============== ================ ===============

  Denominator:
     Denominator for basic income (loss) per share -
        weighted-average shares outstanding                         10,400         12,512            9,720           12,320
                                                             -------------- --------------- ---------------- ---------------
       Effect of dilutive securities:
          Common stock options                                       1,292                           1,274
          Common stock warrants                                        655                             644
          Convertible preferred stock                                  741                             742
                                                             -------------- --------------- ---------------- ---------------
          Dilutive potential common shares                           2,688              --           2,660               --
                                                             -------------- --------------- ---------------- ---------------
       Denominator for diluted income (loss) per
           share - weighted-average shares and
           assumed conversions                                      13,088         12,512           12,380           12,320
                                                             ============== =============== ================ ===============

  Basic income (loss) per common share                                $.15          $(.54)            $.11           $(1.33)
                                                             ============== =============== ================ ===============

  Diluted income (loss) per common share                              $.12          $(.54)            $.09           $(1.33)
                                                             ============== =============== ================ ===============
</TABLE>

5.  Equity Transactions during the Quarter Ended June 30, 1999 and Subsequent to
    June 30, 1999

    Conversion of Preferred Stock

    In May and June  1999,  approximately  114,000  shares of common  stock were
    issued on conversion  of 12,858  shares of Series B preferred  stock and 300
    shares of Series C preferred stock and related accrued but unpaid dividends.
    Subsequent to June 30, 1999,  approximately  137,000  shares of common stock
    were  issued on  conversion  of 500 shares of Series C  preferred  stock and
    related accrued but unpaid dividends.

                                       12
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

    Warrants for the Purchase of Common Stock

    In  connection  with the  extension of the due date of the  $4,000,000  note
    payable described in Note 3, the terms of existing warrants for the purchase
    of  185,713  shares of common  stock were  amended  to extend  the  exercise
    periods  for one year and to lower the  exercise  prices to  current  market
    value of Covol's common stock. The extended,  repriced  warrants were valued
    at approximately  $244,000,  which value is being amortized as interest over
    the revised  term of  repayment.  A member of Covol's  Board of Directors is
    affiliated with this corporation.

    Stock Options

    During the three months ended June 30, 1999, Covol granted an option for the
    purchase  of a total of 250,000  shares of common  stock to a  director  and
    officer.  The exercise price was equal to the market value of Covol's common
    stock on the date of grant.

6.  Commitments and Contingencies

    Commitments and  contingencies as of June 30, 1999 not disclosed  elsewhere,
    are as follows:

    Letters of Credit

    During fiscal 1998, Covol entered into letter of credit  arrangements with a
    bank that  provide  for the  issuance  of letters of credit  totaling  up to
    $938,000. As of June 30, 1999, there were $698,000 of outstanding letters of
    credit.  Certificates  of deposit  totaling  $698,000  that are  included in
    restricted investments in the accompanying balance sheet collateralize these
    arrangements.

    Legal or Contractual Matters

    Included in accrued  liabilities  at September 30, 1998 and June 30, 1999 is
    $755,000  related to  construction  contracts  that  contain a  "failure  to
    proceed" liability clause.

    During 1997,  Covol  entered  into an  agreement to purchase  coal fines and
    through June 30, 1999 has made payments totaling  approximately  $3,916,000,
    of  which  $239,000  has  been  transferred  to  cost  of  coal  briquetting
    operations.   The  net  amount  paid  has  been   recorded  as  advances  on
    inventories.  Covol expects to either  utilize or sell these coal fines,  at
    which time the related costs will be expensed. Under the agreement, Covol is
    obligated to pay a total of  $5,500,000  between  February 1997 and May 2000
    for the  removal of 2 million  tons of coal fines (a price of $2.75 per ton)
    from the property. Quarterly payments of approximately $396,000 are required
    under  the  agreement.  The  agreement  also  provides  for  removal  of  an
    additional 500,000 tons at $2.75 per ton. No payment is required for removal
    of any coal fines in excess of 2.5 million  tons.  Covol is seeking to amend
    the agreement.

    In March 1997,  Covol  transferred the Utah Synfuel #1 facility to Coaltech.
    In connection with this  transaction,  Utah Synfuel #1 licensed  Coaltech to
    use Covol's binder  technologies  for an advance  license fee of $1,400,000,
    which is being recognized as income over the contractual term of the license
    agreement of 2007, and an earned  license fee that is payable  quarterly and
    that is based upon  synthetic fuel produced and sold at the Utah facility by
    Coaltech.  Covol  contracted with Coaltech to operate the facility for which
    Covol  receives a quarterly  fee,  which is also based upon  synthetic  fuel
    produced and sold.  The limited  partners of Coaltech have an option wherein
    they can require Covol to repurchase this facility under certain conditions.
    This put option can be exercised if 1) none of the limited partners are able
    to utilize the federal  income tax credits under Section 29 of the tax code,

                                       13
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

    2) the economic  benefits  accruing to or experienced by all of the Coaltech
    limited partners differ significantly from what was initially projected,  or
    3) there is a permanent  force majeure or material  damage or destruction of
    the Utah facility.  If the put option is exercised  prior to March 2000, the
    option  price  will  be  equal  to the  fair  market  value  of the  limited
    partnership  interests of the optionees on a going concern basis,  but in no
    event will the option price exceed 50% of the capital  contributions paid to
    Covol by  Coaltech.  If the put option is  exercised  after March 2000,  the
    option price will be $10. In accordance with generally  accepted  accounting
    principles  and  after  discussion  with  the  staff of the  Securities  and
    Exchange  Commission,  this transaction has not been reflected as a sale for
    accounting  purposes.  The original  cost of the facility less cash payments
    received from Coaltech,  is reflected in the consolidated balance sheet as a
    facility transferred under note receivable arrangement.

    Additionally,  Covol  entered  into a supply  and  purchase  agreement  with
    Coaltech  wherein  Covol  agreed  to  provide  to  Coaltech  coal  fines for
    processing  into  synthetic  fuel at a price  equal to Covol's  cost.  Covol
    agreed to purchase from Coaltech the synthetic fuel produced,  at Coaltech's
    cost plus one dollar per ton.  As a result of this  commitment  to  purchase
    Coaltech's   production,   Covol  has  experienced  losses  related  to  the
    write-down of the synthetic  fuel  purchased to the lower of cost or market.
    This  write-down to date has  approximated  90% of the amount Covol has paid
    for the synthetic fuel. Based upon expected  manufacturing costs and current
    coal  prices,  Covol  expects to incur a loss under this supply and purchase
    agreement which will reduce the earned license fees received. Covol believes
    that  over the life of this  arrangement,  total  earned  license  fees will
    exceed total losses incurred under the supply and purchase agreement.  Also,
    Covol believes  Coaltech cannot require Covol to purchase  product for which
    Covol does not have third party sales, limiting such losses.

    In June 1996, Covol formed Alabama Synfuel #1, Ltd. to construct a synthetic
    fuel facility.  In connection with the construction of this facility,  Covol
    entered into a supply  agreement  for coal fines to be used at the facility,
    under which Covol was obligated to purchase a minimum of 20,000 tons of coal
    fines per month through  December 2001. Covol assigned this agreement to the
    purchaser of the facility and accordingly,  has no ongoing obligation. Covol
    has been  paid for the  coal  fines  purchased  but has a  dispute  with the
    provider  of the coal fines for a portion of the coal fines  Covol paid for.
    The resolution of this dispute is not expected to have a material  impact on
    Covol.

    In December 1996,  Covol entered into license  agreements with affiliates of
    Pace  Carbon  Fuels,  L.L.C.  (collectively  "Pace")  for the use of Covol's
    binder   technologies  at  four  synthetic  fuel  manufacturing   facilities
    developed by Pace. In 1998 Pace  requested an adjustment in the license fees
    payable to Covol under the license  agreements.  Upon condition of immediate
    payment by Pace of amounts due under the original license  agreement,  Covol
    agreed to a reduction in future  earned  license  fees.  This  reduction was
    accomplished  by a ten-year loan agreement  whereby Covol would loan to Pace
    up to $750,000 each quarter  beginning in November  1998.  This loan will be
    repaid to Covol at the end of the ten years only if the Pace  projects  have
    accumulated  sufficient  prescribed  earnings.  Revenues from earned license
    fees will be recognized by Covol only to the extent that amounts  exceed the
    loan   commitment.   Pace  has  requested  three  quarterly  loans  totaling
    $2,250,000.  Covol  believes  that its current  loan  obligation  to Pace is
    limited to the earned  license  fees  receivable  by Covol for the  quarters
    ended September 30, 1998 through June 30, 1999,  which amounts are estimated
    at  $854,000  in  total.  Pace and  Covol are  renegotiating  their  license
    agreements,  which  negotiations could result in a reduction and/or deferral
    of the receipt of future license  royalty  payments.  Covol expects  revised
    agreements to replace the ten-year loan arrangements.

    In  January  1996,  a  manager  of Covol  entered  property  owned by Nevada
    Electric  Investment  Company, a subsidiary of Nevada Power Corporation,  in
    connection with an offer by Covol to purchase the property, and with certain
    other employees of Covol,  removed some asbestos over a two-day  period.  In
    May 1996, Covol received a notice of violation and order for compliance from
    the State of Utah,  Division  of Air  Quality  alleging  that  asbestos  was
    improperly handled,  removed, and disposed of. Covol complied with the order
    and in September 1996 entered into a settlement  agreement with the State of
    Utah  and paid a fine in the  amount  of  $11,000.  In late  1997,  the U.S.

                                       14
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                                   ----------

    Environmental  Protection Agency began its own investigation,  referring the
    matter to the U.S.  Attorney's  office  which  proceeded  with a grand  jury
    inquiry.  Covol was served in September  1998 with a grand jury subpoena for
    records,  with which Covol has complied.  Covol does not know the results of
    the grand jury inquiry or whether the inquiry is  completed.  Covol does not
    believe  that the  resolution  of this matter  will have a material  adverse
    effect on Covol.

    In September 1996,  Covol entered into an agreement with Coalco  Corporation
    whereby Coalco was to advise Covol with respect to the financing and sale of
    certain  synthetic fuel  manufacturing  facilities.  To date, Covol has paid
    Coalco  approximately  $347,000  pursuant  to the  agreement.  A dispute has
    arisen between Covol and Coalco about services rendered or to be rendered by
    Coalco and the amount and timing for payment for such  services.  There have
    been ongoing  discussions  between Covol and Coalco in an attempt to resolve
    their differences.  The potential  liability to Covol is not known.  Covol's
    management  believes the resolution of this dispute could have a significant
    financial impact on Covol,  which impact is most likely to be a reduction of
    future revenues. Pelletco, an affiliate of Coalco, is a licensee of Covol.

    In March 1999,  Covol  entered into a financing  transaction  involving  the
    issuance of convertible  preferred stock and a convertible secured note. The
    transaction  requires,  among other things, (1) stockholder  approval of the
    transaction,  (2)  registration  of common  stock into which the  securities
    issued may be converted,  and (3) achievement of earnings targets  beginning
    in the first quarter of Covol's  fiscal year 2000.  Covol is preparing for a
    special stockholder  meeting to seek approval of the financing  transaction.
    Covol has filed  registration  statements on Form S-3 to register the common
    stock  into  which  the  securities  issued  in  the  March  1999  financing
    transaction  are  convertible  as  well  as to  fulfill  other  registration
    commitments.  The SEC has engaged in a review of the registration statements
    and Covol's periodic reports under the Securities  Exchange Act of 1934, and
    accordingly  effectiveness of the  registration  statements has been delayed
    beyond what Covol expected while Covol responds to SEC staff comments. Covol
    is also marketing its owned synthetic fuel  manufacturing  facilities and is
    assisting  licensees  with  synthetic  fuel  production  issues  in order to
    improve the likelihood of reaching the required earnings targets. Failure to
    comply with these covenants could have serious  adverse  effects,  including
    default under the financing agreements.

                                       15
<PAGE>

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

The following Management's Discussion and Analysis should be read in conjunction
with the  accompanying  unaudited  consolidated  financial  statements and notes
thereto.

Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

Revenues.  Total  revenues  for the three  months  ended June 30, 1999  ("1999")
decreased by $4,350,000  to  $1,385,000 as compared to $5,735,000  for the three
months ended June 30, 1998 ("1998").  During 1999, Covol recognized license fees
totaling  $661,000 while license fees of $3,185,000 were recognized during 1998.
The license fees in 1999 consisted of earned license fees or royalty payments of
$626,000 and $35,000 of amortization  related to the $1,400,000  advance license
fee from  Coaltech.  The license  fees in 1998  consisted  of  one-time  advance
license fees of $3,150,000 and $35,000 of amortization related to the $1,400,000
advance license fee from Coaltech.  Earned license fees or royalty  payments are
due quarterly  based upon  synthetic fuel produced and sold as reported to Covol
by its licensees. Advance license fees are normally due when construction of the
related synthetic fuel facility begins, when construction is completed,  or when
certain construction milestones or other specified conditions are met. Covol may
receive  additional  advance license fees during 1999 upon the sale of synthetic
fuel  facilities  currently  owned by Covol or upon the  achievement  of certain
production levels at two other synthetic fuel facilities. Earned license fees or
royalty payments are expected to increase at moderate levels in the near term.

Covol provides  binder  material to its licensees  either at a fixed price or at
Covol's cost plus a contracted  markup.  Covol purchases binder material under a
long-term  contract  with a  large  chemical  company.  Total  binder  sales  to
non-related parties during 1999 were $409,000,  with a corresponding direct cost
to Covol of $291,000,  excluding related labor and overhead.  In 1998, Covol had
no binder sales to non-related parties. Covol had sales of binder and coal fines
to related parties during 1999 totaling  $50,000  compared to $1,248,000  during
1998.  These  revenues  resulted  primarily  from coal  fines  that were sold at
Covol's cost to a related party under a non-recurring contractual obligation, as
provided  for under the binder and license  agreement  with this  entity.  Covol
received  revenues from binder plant sales of $1,298,000,  with a  corresponding
cost of $1,095,000, during 1998, while no such sales occurred during 1999.

Synthetic  fuel sales were $242,000 in 1999 compared to $0 in 1998 and represent
the sale of product from Covol-owned facilities. This revenue is not expected to
increase  significantly  because  Covol is  expecting  to sell all of its  owned
facilities in the near-term future.

Covol expects an increase  during 1999 of production and sales of synthetic fuel
by its licensees as they improve production  capability and establish  marketing
agreements for the synthetic fuel produced.  This will result in a corresponding
increase  in  earned  license  fees or  royalty  payments  and  sales of  binder
products.  However,  Covol  cannot  assure  increases in license  fees,  royalty
payments,  and binder sales because Covol's licensees must  successfully  obtain
adequate feedstock or coal fines, process fines into synthetic fuel, and develop
markets for synthetic fuel. Covol believes that its licensees have made progress
in these  areas  during  the  quarter  ended  June  30,  1999,  but  significant
improvement is still needed and continued  progress and eventual  success cannot
be assured.

Synthetic  fuel is a relatively  new product and  competes  with  standard  coal
products.  Industrial  coal users must be satisfied that the synthetic fuel is a
suitable  substitute for standard coal  products.  Moisture  content,  hardness,
special handling  requirements and other  characteristics  of the synthetic fuel
product may affect its  marketability,  and sales price.  Many  industrial  coal
users are also limited in the amount of synthetic fuel product they can purchase
because  they have  committed  to purchase a  substantial  portion of their coal
requirements  through  long-term  contracts.  Reliance  on spot  markets and the
overall  downward  trend in coal prices in the utility  industry have  generally
produced  lower sales prices  compared to long-term  coal supply  contracts.  To
date, Covol owned  facilities and licensees have secured  contracts for the sale
of only a portion of their  production.  Convincing buyers of the suitability of
synthetic fuel as a coal substitute, particularly the quality characteristics of
synthetic fuel, and the traditional  long-term supply contract practices of fuel
buying in the utility  industry  have made the  identification  of purchasers of

                                       16
<PAGE>

synthetic  fuel  difficult.  Because  synthetic fuel is a coal  substitute,  the
market and price are as broad and varied as the coal market itself.  The US coal
market   exceeds  one  billion  tons   annually,   and  the  prices  range  from
approximately  $12 to $35 per ton in the areas where  facilities using the Covol
technology  are located.  Prices are  dependent on many  factors,  including Btu
content, ash and sulfur content,  moisture,  location,  etc. Covol believes that
once initial market resistance is overcome  long-term  contracts will be secured
for the synthetic  fuel, and that Covol and its licensees will be able to market
all synthetic fuel produced at prices similar to coal.

Our  accounting  and valuation  procedures  are based on all of the  Covol-owned
facilities  qualifying  for  section  29 tax  credits  so  that  synthetic  fuel
production  will  continue to be the highest and best use of this  equipment and
facilities.  If the  facilities  were used in an  alternative  application,  the
equipment and  facilities=  carrying  value would likely be higher than the fair
value based on the  alternative  highest and best use,  which could result in an
impairment charge at that time.

Operating Costs and Expenses. Operating costs and expenses increased by $923,000
to $5,961,000  during 1999 from $5,038,000 during 1998. Cost of coal briquetting
operations increased $1,457,000 from $1,409,000 during 1998 to $2,866,000 during
1999, and cost of binder and coal fines - related parties  decreased  $1,049,000
from $1,056,000  during 1998 to $7,000 during 1999.  During 1999, Covol incurred
significantly  higher  operating  expenses  in  connection  with  the  continued
refinement and  commercialization  of the briquetting process in connection with
the 24 facilities  placed in service  during 1998,  and in  particular  the four
facilities  owned by Covol which are  currently  held for sale.  These  expenses
primarily  related to labor and operating  expenses at the four Covol  synthetic
fuel  facilities  and the wash  plant  located  in Utah,  losses  related to the
write-down of Coaltech inventory,  and costs incurred in providing assistance to
Covol's   licensees  in  resolving   ramp-up  issues  at  their  synthetic  fuel
facilities. Covol expects to realize a gain from the sale of the four facilities
held for sale.  Covol expects to continue  incurring  operating  losses from the
facilities until they are sold.

Covol operates one of the synthetic fuel facilities for Coaltech,  a partnership
for which  Covol is the  general  partner  and 1% owner.  Under  this  operating
agreement,  Covol is  contractually  obligated  to purchase the  synthetic  fuel
produced by Coaltech at cost plus $1 per ton.  Production of synthetic fuel from
this facility during 1999 and 1998 was not significant and accordingly, the cost
per ton is well in excess  of the  current  market  value.  These  costs and the
corresponding  write-down of this  inventory to its market value are included in
the  cost of coal  briquetting  operations.  The  write-down  was  approximately
$800,000  during 1999 and $900,000  during 1998.  The excess cost per ton should
decrease in the remainder of 1999 as production volumes at the Coaltech facility
increase.

Covol believes Coaltech cannot require Covol to purchase product for which Covol
does not have third party sales,  limiting  such losses.  Covol has operated the
Utah facility at a loss because of the need to gain operating experience (it was
the first  synthetic fuel facility Covol built and operated),  test  alternative
production  methods,  maintain  operational status for Section 29 qualification,
maintain the  relationship  with Coaltech  partners,  and other related business
reasons.

Asset  Impairment  Charge.  In May 1995,  Covol  entered into an agreement  with
Geneva Steel Company to build and operate a commercial briquetting facility. The
facility never reached commercial operating levels, but was held for other uses,
including  potential  relocation  to another site for use in the  production  of
synthetic  fuel or in other  applications.  In  February  1999,  Geneva  filed a
voluntary  petition for relief under Chapter 11 of the United States  Bankruptcy
Code due to a lack of sufficient liquidity. Primarily as a result of this event,
Covol moved a substantial portion of the equipment  comprising the facility from
the  Geneva  site to  another  location  where it is being  used in a  different
application of Covol's technology.  Certain assets at the Geneva site, primarily
consisting  of leasehold  improvements  on the  property  where the facility was
located,  were  abandoned.   The  carrying  value  of  these  assets,   totaling
approximately $556,000, was written off during 1999.

Selling,  general  and  administrative  expenses  increased  $227,000  or 20% to
$1,338,000  during 1999 from  $1,111,000  for 1998.  The largest  components  of
selling,  general and  administrative  expenses for 1999 and 1998 were  payroll,
professional   services,   and  travel   expenses.   Payroll   costs   increased
approximately $148,000 from 1998 to 1999 due to increased headcount.  Changes in
the  other  categories  from  year to year were not  material.  Amortization  of

                                       17
<PAGE>

intangible  assets increased from $0 in 1998 to approximately  $113,000 in 1999,
primarily  as a result of the late 1998  exchange  of common  stock of Covol for
limited partnership interests.

Research and development  costs increased  $73,000 to $154,000 from 1998 to 1999
primarily  because  Covol has focused  additional  personnel  and  resources  on
further  refinement of its binder  technologies  relative to the synthetic  fuel
industry  and to a lesser  extent as a result of the  application  of its binder
technologies into other areas.

Compensation expense from stock options,  stock warrants, and issuance of common
stock  increased  $463,000 to $749,000  for 1999 from  $286,000  for 1998.  This
expense relates to options granted in prior periods that vest over several years
and the  compensation  value that is being  recognized  as an  expense  over the
vesting  period.   During  1999,   Covol  terminated  three  employees  to  whom
compensatory stock options were granted in prior years. These stock options were
not forfeited upon termination.  In 1999,  approximately $600,000 of expense was
for the write off of the  unamortized  deferred  compensation  related  to these
individuals.

Other  Income  and  Expense.  During  1999,  Covol  had net  other  expenses  of
$1,699,000  compared to $901,000 of net other income for 1998.  This increase of
$2,600,000 in net expense relates  primarily to an increase in interest  expense
of $1,981,000  and a change  between  periods of $532,000 in the  mark-to-market
adjustment  of  the  carrying  value  of  the  related  party  note   receivable
collateralized by common stock.

Interest  expense in 1998 was $0 because all interest costs were  capitalized as
part of the costs of construction of synthetic fuel facilities. Interest expense
of  $1,981,000  in 1999  consisted of interest  accrued on notes payable used to
finance the  construction  of synthetic  fuel  facilities  held for sale and for
operating purposes. Interest expense has increased by approximately $850,000 per
quarter as a result of the debt  issued in March  1999.  Interest  expense  will
decrease  as a result of any future  repayments  of debt  related to the sale of
facilities held for sale.

During  1996,  Covol  sold  certain  construction   companies  and  received  as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter based upon the market value of Covol's  common stock and is
reflected  in the  consolidated  balance  sheet at the  underlying  value of the
collateral.  This  adjustment  resulted in a write-up of $532,000  during  1998,
compared  to no  adjustment  during  1999 for a net change of  $532,000  between
periods. As of June 30, 1999, the Note had a carrying value of $860,000.

Net  loss.  For  1999,  the net  loss of  $6,275,000  represented  a  change  of
$7,873,000  from net income of $1,598,000  reported for 1998.  This is primarily
due to the significant  decrease in one-time  advance license fee revenues,  the
increase in cost of briquetting  operations,  the asset impairment  charge,  the
increase in amortization of deferred  compensation  from stock options,  and the
increase in interest  expense in 1999.  Covol did not  recognize  any income tax
benefit  in 1999 or 1998  since the  realization  of its  deferred  tax asset of
approximately   $16,000,000,   consisting   primarily  of  net  operating   loss
carryforwards, is dependent on generation of future taxable income.

Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998

Revenues.  Total  revenues  for the nine  months  ended June 30,  1999  ("1999")
decreased by $8,930,000 to  $3,527,000 as compared to  $12,457,000  for the nine
months ended June 30, 1998 ("1998").  During 1999, Covol recognized license fees
totaling  $1,565,000  while license fees of $7,841,000  were  recognized  during
1998.  The license fees in 1999  consisted of earned  license fees of $1,460,000
and $105,000 of amortization  related to the $1,400,000 advance license fee from
Coaltech. The license fees in 1998 consisted of one-time advance license fees of
$7,736,000  and  $105,000  of  amortization  related to the  $1,400,000  advance
license fee from Coaltech.

Total binder sales to non-related  parties during 1999 were  $1,365,000,  with a
corresponding  direct cost to Covol of  $941,000.  In 1998,  Covol had no binder
sales to  non-related  parties.  Covol  had sales of  binder  and coal  fines to
related  parties  during 1999 totaling  $233,000  compared to $3,243,000  during
1998.  These  revenues  resulted  primarily  from coal  fines  that were sold at
Covol's cost to a related party under a non-recurring contractual obligation, as

                                       18
<PAGE>

provided  for under the binder and license  agreement  with this  entity.  Covol
received  revenues from binder plant sales of $1,298,000,  with a  corresponding
cost of $1,095,000, during 1998, while no such sales occurred during 1999.

Synthetic  fuel  sales  were  $242,000  in 1999  compared  to $5,000 in 1998 and
represent the sale of product from Covol-owned  facilities.  This revenue is not
expected to increase significantly because Covol is expecting to sell all of its
owned facilities in the near-term future.

Operating  Costs  and  Expenses.  Operating  costs  and  expenses  increased  by
$4,628,000 to $15,297,000 during 1999 from $10,669,000 during 1998. Cost of coal
briquetting  operations  increased  $6,230,000  from  $2,457,000  during 1998 to
$8,687,000  during  1999,  and cost of binder and coal  fines - related  parties
decreased  $3,031,000 from $3,073,000 during 1998 to $42,000 during 1999. During
1999, Covol incurred  significantly higher operating expenses in connection with
the continued  refinement and  commercialization  of the briquetting  process in
connection  with  the 24  facilities  placed  in  service  during  1998,  and in
particular the operating costs of the four  facilities  owned by Covol which are
currently held for sale. These expenses primarily related to labor and operating
expenses at the four Covol  synthetic fuel facilities and the wash plant located
in Utah,  losses  related to the  writedown  of  Coaltech  inventory,  and costs
incurred in providing  assistance  to Covol's  licensees  in  resolving  ramp-up
issues at their synthetic fuel facilities.

Covol is  contractually  obligated to purchase the  synthetic  fuel  produced by
Coaltech  at cost  plus $1 per ton.  Production  of  synthetic  fuel  from  this
facility during 1999 and 1998 was not significant and accordingly,  the cost per
ton is  well  in  excess  of the  current  market  value.  These  costs  and the
corresponding  write-down of this  inventory to its market value are included in
the  cost of coal  briquetting  operations.  The  write-down  was  approximately
$2,700,000  during  1999 and  $1,900,000  during  1998.  The excess cost per ton
should decrease as 1999 production  volumes at the Coaltech  facility  increase.
Covol  expects to realize a gain from the sale of the four  facilities  held for
sale. Covol expects to continue incurring  operating losses until the facilities
are sold.

Asset  Impairment  Charge.  In May 1995,  Covol  entered into an agreement  with
Geneva Steel Company to build and operate a commercial briquetting facility. The
facility never reached commercial operating levels, but was held for other uses,
including  potential  relocation  to another site for use in the  production  of
synthetic  fuel or in other  applications.  In  February  1999,  Geneva  filed a
voluntary  petition for relief under Chapter 11 of the United States  Bankruptcy
Code due to a lack of sufficient liquidity. Primarily as a result of this event,
Covol moved a substantial portion of the equipment  comprising the facility from
the  Geneva  site to  another  location  where it is being  used in a  different
application of Covol's technology.  Certain assets at the Geneva site, primarily
consisting  of leasehold  improvements  on the  property  where the facility was
located,  were  abandoned.   The  carrying  value  of  these  assets,   totaling
approximately $556,000, was written off during 1999.

Selling,  general  and  administrative  expenses  increased  $497,000  or 17% to
$3,500,000  during 1999 from  $3,003,000 for 1998.  Except for  amortization  of
intangible assets during 1999 and commissions in 1998, the largest components of
selling,  general  and  administrative  expenses  for both  1999  and 1998  were
payroll,  professional  services,  and travel expenses.  Payroll costs increased
approximately  $320,000,  professional services increased approximately $110,000
and travel increased  approximately  $50,000 from 1998 to 1999, due primarily to
increased  headcount and higher legal costs.  Amortization of intangible  assets
increased  approximately  $305,000  related to the late 1998  exchange of common
stock of Covol for limited partnership  interests.  Commission expense decreased
approximately  $320,000  due  primarily  to a  nonrecurring  commission  in 1998
related to a licensee relationship. Changes in the other categories from year to
year were not material.

Research and development costs increased  $188,000 to $497,000 from 1998 to 1999
primarily  because  Covol has focused  additional  personnel  and  resources  on
further  refinement of its binder  technologies  relative to the synthetic  fuel
industry  and to a lesser  extent as a result of the  application  of its binder
technologies into other areas.

Compensation expense from stock options,  stock warrants, and issuance of common
stock  increased  $342,000 to $1,074,000  for 1999 from $732,000 for 1998.  This
expense relates to options granted in prior periods that vest over several years
and the  compensation  value that is being  recognized  as an  expense  over the
vesting  period.   During  1999,   Covol  terminated  three  employees  to  whom
compensatory stock options were granted in prior years. These stock options were

                                       19
<PAGE>

not forfeited upon termination.  In 1999,  approximately $600,000 of expense was
for the write off of the  unamortized  deferred  compensation  related  to these
individuals.

Other  Income  and  Expense.  During  1999,  Covol  had net  other  expenses  of
$3,947,000  compared to $442,000 for 1998.  This increase of $3,505,000  relates
primarily  to a change  between  periods  of  $1,844,000  in the  mark-to-market
adjustment  of  the  carrying  value  of  the  related  party  note   receivable
collateralized  by common stock, an increase in interest  expense of $2,102,000,
and a decrease in minority  interest in losses of  consolidated  subsidiaries of
$321,000, partially offset by an increase in interest income of $935,000.

During  1996,  Covol  sold  certain  construction   companies  and  received  as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter based upon the market value of Covol's  common stock and is
reflected in the balance sheet at the underlying  value of the collateral.  This
adjustment  resulted in a  write-down  of $749,000  during  1999,  compared to a
write-up of $1,095,000  during 1998 for a net change of  $1,844,000.  A $515,000
payment on this Note during 1999 was included in interest income for 1999.

Interest expense in 1998 of $2,292,000 consisted primarily of expense based upon
the issuance of convertible debt and warrants at a discount. Interest expense of
$4,394,000  in 1999  consisted  of  interest  accrued on notes  payable  used to
finance the  construction  of synthetic  fuel  facilities  held for sale and for
operating  needs and  $1,160,000  of  amortization  of debt  discount.  Interest
expense has increased by  approximately  $850,000 per quarter as a result of the
debt issued in March 1999.  Interest  expense  will  decrease as a result of any
future repayments of debt related to the sale of facilities held for sale.

During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama  Synfuel  #1  common  stock of  Covol  in  exchange  for  their  limited
partnership  interests.  These  exchanges,  most of which were  accounted for in
September  1998,  were  substantially  completed by November 1998, at which time
Utah Synfuel #1 became a wholly-owned subsidiary of Covol and Alabama Synfuel #1
became a 98%-owned subsidiary of Covol. As a result of these exchanges, minority
interest in the losses of consolidated subsidiaries decreased from approximately
$321,000  in 1998 to  approximately  $0 in 1999.  Covol  believes  the  combined
operations  of  these  partnerships  will  result  in  operating  losses  in the
near-term future,  all of which losses will now be included in Covol's statement
of operations.

Net  loss.  For  1999,  the net loss of  $15,717,000  represented  a  change  of
$17,063,000  from net income of $1,346,000 in 1998. This is primarily due to the
significant  decrease in one-time advance license fee revenues,  the increase in
cost of briquetting  operations,  the asset impairment  charge,  the increase in
interest  expense,   and  the  change  between  periods  of  $1,844,000  in  the
mark-to-market  adjustment  of the  carrying  value of the  related  party  note
receivable  collateralized  by common stock.  Covol did not recognize any income
tax benefit in 1999 or 1998 since the  realization  of its  deferred  tax asset,
consisting  primarily  of net  operating  loss  carryforwards,  is  dependent on
generation of future taxable income.

Liquidity and Capital Resources

Liquidity.  During the fiscal year 1998,  Covol and its licensees  completed the
construction  of and began  operations at 24 synthetic  fuel  facilities.  Covol
currently owns four facilities  which it constructed and which are being offered
for sale and has entered into a non-binding letter of intent for the sale of one
of these  facilities.  Covol  anticipates sale of the facilities before December
31, 1999. Proceeds from the sale of these facilities will be used to retire debt
that was incurred  principally in connection with the construction and operation
of these  facilities and for working  capital needs.  Total  operating  expenses
associated with the four owned facilities cost approximately  $700,000 per month
during the most recent quarter.  These operating expenses fluctuate depending on
the level of activity at the owned facilities.

                                       20
<PAGE>

Net cash used in  operating  activities  for the nine months ended June 30, 1999
("1999") was  $14,388,000  compared to  $1,119,000  of cash used during the nine
months  ended June 30, 1998  ("1998).  Substantially  all of this change in cash
flow from  operations is  attributable  to the 1999 net loss of  $15,717,000  as
compared to  $1,346,000  of net income in 1998.  Covol has been able to fund its
operating  activities,  including the continued refinement and commercialization
of its patented  binder  technologies,  through the  incurrence  of debt and the
issuance of convertible preferred stock, common stock and common stock warrants.
During 1999,  proceeds from the issuance of notes payable totaled  approximately
$10,453,000,  proceeds from the issuance of preferred  stock totaled  $6,367,000
and proceeds from the issuance of common stock totaled $3,775,000.

Capital  Resources.   During  1999,   Covol's  investing   activities  were  not
significant.  Investing  activities  in  1998  were  significant  and  consisted
primarily  of the  purchase  of  property,  plant  and  equipment  and the  four
facilities held for resale,  with most of the funds for these activities  coming
from the issuance of notes payable ($32,570,000) and from working capital. Covol
believes  that funds  required  for  investing  activities  will  continue to be
significantly  lower during 1999 as compared to 1998 because the construction of
synthetic  fuel  facilities  that qualified for federal income tax credits under
Section 29 of the IRC were completed during fiscal 1998. In order to receive tax
credits  under IRC  Section  29, the  synthetic  fuel sold must be produced at a
facility placed in service by June 30, 1998.

In June 1999,  Covol announced that it had entered into two non-binding  letters
of intent with an affiliate of a major U.S. electric utility company. One letter
of intent is for the sale of a single synthetic fuel facility.  The other letter
of intent, if fully  consummated,  would result in the sale of Covol's synthetic
fuel business,  including the remaining three Covol-owned facilities and royalty
interests from third-party licensees. Covol's long-term existence depends on the
ability of Covol's  licensees to produce and sell  synthetic  fuel at sufficient
levels to generate  earned license fees or royalties to Covol in amounts greater
than operating expenses.

There are 24 synthetic fuel plants that utilize Covol's patented  technology and
from which Covol intends to earn license fees. These facilities do not presently
operate at levels  needed to generate  significant  revenues to Covol.  Improved
operations  at each of these plants  depend on the ability of the plant owner to
produce  synthetic fuel that meets market  specifications in order for the plant
owner to market the synthetic fuel. Covol is assisting the plant owners in their
efforts to overcome  production and marketing  problems.  Covol anticipates that
earned  license fees or royalties from the production and sale of synthetic fuel
will  continue  to  increase  during  1999 and in  2000.  As  production  levels
increase,  sales of the binder  materials by Covol to its licensees are expected
to increase  proportionately.  Funds received by Covol from these activities are
not expected to be  sufficient  to cover  Covol's  operating  costs and expenses
until early 2000.

In order for operating  activities to produce  significant  positive cash flows,
Covol and its licensees must  successfully  address certain operating issues and
marketing  difficulties.  These problems have delayed Covol's expected growth in
license  fees,  and have  resulted in lower than  expected cash flows and higher
than expected  capital  requirements.  Operating  issues which must be addressed
include, but are not limited to, feedstock  availability,  moisture content, Btu
content,  correct application of binder  formulation,  operability of equipment,
product  durability,  resistance  to  water  absorption  and  overall  costs  of
operations, which in many cases to date have resulted in unit costs in excess of
synthetic  fuel sale  prices.  Marketing  difficulties  which must be  addressed
relate to market  acceptance  of  products  manufactured  using our  technology.
Industrial  coal users must be satisfied  that the synthetic  fuel is a suitable
substitute  for standard coal  products.  Moisture  content,  hardness,  special
handling  requirements and other  characteristics  of the synthetic fuel product
may affect its marketability and its sales price. Many industrial coal users are
also limited in the amount of synthetic  fuel product they can purchase  from us
and our licensees because they have committed to purchase a substantial  portion
of their coal requirements through long-term contracts. Reliance on spot markets
and the overall downward trend in coal prices have generally produced lower sale
prices compared to long-term coal supply contracts in the utility  industry.  To
date, our owned facilities and licensees have secured  contracts for the sale of
only a portion of their production.  The suitability of synthetic fuel as a coal
substitute,  particularly the quality characteristics of synthetic fuel, and the
traditional  long-term  supply contract  practices of fuel buying in the utility
industry have made the identification of purchasers of synthetic fuel difficult.
Covol  believes  that once initial  market  resistance  is  overcome,  long-term
contracts  will be  secured  for the  synthetic  fuel,  and that  Covol  and its
licensees  will be able to market all synthetic  fuel produced at prices similar
to coal.

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<PAGE>

Covol's short-term  existence depends on the procurement of additional financing
and the  extensions  of existing debt  repayment  terms in order to enable it to
maintain  adequate  liquidity  until it can sell its facilities held for sale or
consummate the transactions contemplated by the letters of intent.

During  November  1998,  Covol issued common stock and common stock warrants for
total net proceeds of  approximately  $3,730,000.  During  January  1999,  Covol
issued  convertible  preferred  stock and  warrants  for total net  proceeds  of
approximately  $900,000.  During March 1999,  Covol issued  convertible  secured
debt, convertible redeemable preferred stock and common stock warrants for total
net proceeds of  approximately  $14,800,000.  Covol is currently in  discussions
with  creditors  to whom debt is owed in August 1999 and is also in  discussions
with several  potential  lenders with regard to its short-term  financing needs.
Covol is using all  available  resources to remain  solvent and will continue to
pursue the extension of due dates of debt, additional financing, the sale of its
facilities held for sale, and consummation of the  transactions  contemplated in
the letters of intent.  Covol  believes it will be able to extend the  repayment
terms of its debt and that the funds raised in additional  financings and excess
proceeds  from  the  sale of  facilities  will  be  sufficient  to fund  Covol's
operations until its operating  activities begin producing positive cash flow or
it can consummate the transactions contemplated by the letters of intent.

In connection with the financing Covol obtained in March 1997,  Covol has agreed
to certain covenants  contained in the recently completed  financing  documents.
One covenant  requires  Covol to meet certain  earnings  targets for the quarter
ending  December 31, 1999 and for  subsequent  quarters.  Consolidated  earnings
before interest, taxes, depreciation and amortization (EBITDA) and certain other
adjustments, of $5,000,000 is required for the quarter ending December 31, 1999.
The EBITDA target increases in subsequent  quarters.  It is not known whether or
not Covol will be able to comply with this provision. Covol's current operations
are  at  levels  below  this  requirement;  however,  the  sale  of  Covol-owned
facilities  held  for  sale is  expected  to  result  in a  gain.  Additionally,
operating  expenses  will  decrease  as a result of the sale of the  facilities.
Operation of the synthetic fuel  facilities at or near capacity should result in
EBITDA  at  levels  in  excess  of this  requirement.  Non-compliance  with this
provision  would result in an increase in the debt coupon rate by one percentage
point immediately and each 90 days thereafter until cured.  Also, the debt would
become  immediately  convertible.  Upon the second event of non-compliance  with
this provision,  Covol will be required to deposit approximately $3,000,000 into
an escrow  account.  Failure to make payments into the escrow account results in
royalty  payments  from the related  collateral  being made directly to the debt
holders.  There are other  provisions and covenants in these loan documents that
may restrict or prohibit certain activities.

Covol  May Be  Adversely  Affected  By  Year  2000  Non-Compliance  of  Computer
Applications

The Year 2000 issue is the result of computer  programs  being written to define
the  applicable  year using two digits rather than four digits.  Thus,  programs
that are date  sensitive may recognize a date using "00" as the year 1900 rather
than 2000.  This could result in a systems  failure or  miscalculations  causing
disruptions  of operations  including a temporary  inability to engage in normal
business  activities.  This systems issue creates risk for Covol from unforeseen
problems in its own computer  systems and  electronic  equipment  and from third
parties with which Covol conducts  business.  Such failures of Covol's and third
parties'  computer  systems could  potentially have a material adverse impact on
Covol's  business and results of operations.  While the risks  discussed in this
section have a possible  material  impact,  management  believes the actions and
contingency  plans that are being developed and implemented  will  significantly
reduce the probability and potential impact of these identified risks.

The information  systems and electronic  equipment  utilized in Covol's business
include a computer network system utilized for  intra-company  communication and
Internet  access  and an  accounting  software  package  utilized  for  billing,
procurement,  payroll  and  accounting.  Non-information  technology  electronic
equipment   includes   programmable   logic   controllers,    micro-controllers,
specialized  software  packages  for  operations  activities  and  miscellaneous
systems for lab equipment.

As a  part  of the  information  technology  systems  mentioned  above,  Covol's
computer network system was upgraded in 1998 with year 2000 compliant equipment.

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<PAGE>

The provider of the accounting software has indicated that this software package
is not currently  compliant but can be upgraded at nominal cost.  This work will
be undertaken and tested prior to the close of the fiscal year.

All of the synthetic fuel facilities constructed by Covol and its licensees were
completed and placed in service  between  December 1996 and June 30, 1998,  with
the majority being  completed  during 1998. As such,  the  electronic  equipment
utilized in the facilities is of recent vintage (within 18 months of the June 30
date) and, based on  notification  from the suppliers,  is year 2000  compliant.
Suppliers of the major  electronic  equipment  for Covol's four owned  synthetic
fuel  facilities  have notified  Covol that their  equipment is compliant.  This
includes critical programmable logic controllers, micro-controllers and software
operating packages.

Licensees utilize proprietary technology provided by Covol including flow sheets
and equipment  recommended  by Covol in the  construction  of their  facilities.
These licensees have represented to Covol that equipment within these facilities
is  compliant  or that  operations  will  not be  impacted  in the  event  of an
equipment  failure due to the Year 2000  issue.  Malfunctions  occurring  in the
synthetic fuel operations  could  potentially have an adverse material effect to
Covol by reducing the sale of binder formulation  materials to the facilities by
Covol and the  collection  by Covol of royalties on the  production of synthetic
fuel.

Covol's   relationships  with  its  third-party   suppliers  and  transportation
providers is critical to the operation of the synthetic fuel  facilities.  Covol
is also dependent upon its customers who purchase and consume the synthetic fuel
produced.  Covol's  suppliers  have  represented  to Covol that  their  computer
systems and equipment are year 2000 compliant.

The most reasonably likely worst case scenarios would be the extended  inability
of major  suppliers  to  deliver  binder  formulation  materials  and other bulk
materials  required for the operation of the synthetic  fuel  facilities and the
failure  of  customers  to be able to  receive  synthetic  fuel  product  due to
unforeseen shutdown due to non-compliant equipment.

As a contingency plan for the reasonably likely worst case events, Covol intends
to stock up on bulk materials in the last half of the fourth quarter of calendar
1999 so that  operations can continue for several days into the new year without
interruption.  Covol has designed its facilities to accommodate bulk deliveries.
Electrical power suppliers have notified Covol that power  interruptions are not
anticipated but that additional  crews will be on hand to respond to problems as
they may occur at the change to the new year.  Covol and its  licensees are also
prepared to bypass  automated  controls and operate facility systems manually if
the  automated  control  systems  fail.  As supply  contracts  are  written  for
operating  materials,  Covol is striving to negotiate  terms such that year 2000
issues are not an excuse for non-performance.

Costs attributable to Year 2000 issues are expected to be minimal. The only cost
anticipated to date is for the upgrade to Covol's  accounting  software package.
This cost is estimated to be less than $5,000.  Costs  associated with increased
levels of bulk materials  simply  redistributes  normal operating costs but does
not affect the ultimate financial performance of Covol.

Covol plans to continue to monitor the Year 2000 issue  throughout the remainder
of 1999.  Should this  monitoring  reveal  other  developments,  whether they be
internal  or third  party,  or  identify  additional  electronic  equipment  and
software  that  may be at  risk,  Covol  will  assess  the  situation  and  take
appropriate action.  There can be no assurance that Covol will discover all Year
2000 issues in the course of the remainder of 1999 or that Covol will be able to
remedy any or all discoveries in a timely or cost effective manner such that the
Year 2000 issues will not have a material  adverse  impact on Covol's  business,
financial condition and results of operations.

Forward Looking Statements

Statements in this Item 2 regarding  Covol's  expectations that relate to future
plans,  possible  transactions,  financial  results  or  performance  and  other
information   presented  herein  that  are  not  purely  historical  in  nature,
constitute   forward-looking  statements  within  the  meaning  of  the  Private
Securities  Litigation  Reform Act of 1995.  Although  Covol  believes  that its
expectations  are  based on  reasonable  assumptions  within  the  bounds of its

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<PAGE>

knowledge of its business and operations,  there can be no assurance that actual
results will not differ materially from its expectations.  There are a number of
business  factors  which  singularly  or  combined  may  affect  Covol's  future
operating results. In addition to matters affecting Covol'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:

o    Ability  to   successfully   negotiate   terms  and   consummate   proposed
     transactions,
o    Ability to sell Company-owned synthetic fuel facilities on favorable terms,
o    Ability to obtain necessary capital or financing,
o    Ability  to  comply  with  covenants  in  financing  agreements,  including
     financial performance criteria,
o    Ability  to  conserve  capital  through  cost  reductions  until  operating
     revenues exceed expenses,
o    Ability  of  licensees  to  market  synthetic  fuel  produced,   generating
     royalties for Covol,
o    Ability of licensees  to achieve  expected  production  levels at synthetic
     fuel facilities,
o    Favorable IRS tax treatment,
o    Availability of natural resources and suitable raw materials,
o    Ability to locate appropriate sites for facilities,
o    Ability of Covol to complete  specific  research and development  projects,
     and
o    Commercial viability of technologies.

See "ITEM 1.  BUSINESS--Forward  Looking Statements" in Covol's Annual Report on
Form 10-K for the year ended  September 30, 1998 for a description of additional
factors which could cause actual results to differ from expectations.

Other Items

Covol  has  reviewed  all  recently  issued,  but  not yet  adopted,  accounting
standards  in order to  determine  their  effects,  if any,  on the  results  of
operations or financial position of Covol. Based on that review,  Covol believes
that none of these  pronouncements  will have any significant effects on current
or future financial position or results of operations.


                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Asbestos  Investigation.  In January 1996, a manager of Covol  entered  property
owned by Nevada  Electric  Investment  Company,  a  subsidiary  of Nevada  Power
Corporation,  in connection with an offer by Covol to purchase the property, and
with certain  other  employees of Covol,  removed some  asbestos  over a two-day
period.  In May  1996,  Covol  received  a notice  of  violation  and  order for
compliance  from the  State of  Utah,  Division  of Air  Quality  alleging  that
asbestos was improperly handled,  removed,  and disposed of. Covol complied with
the order and in September  1996 entered  into a settlement  agreement  with the
State of Utah and paid a fine in the amount of $11,000.  In late 1997,  the U.S.
Environmental  Protection  Agency  began its own  investigation,  referring  the
matter to the U.S.  Attorney's office which proceeded with a grand jury inquiry.
Covol was served in September 1998 with a grand jury subpoena for records,  with
which  Covol has  complied.  Covol  does not know the  results of the grand jury
inquiry or whether the  inquiry is  completed.  Covol does not believe  that the
resolution of this matter will have a material adverse effect on Covol.

ITEM 2.     CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

The following sets forth all  securities  issued by Covol 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.

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<PAGE>

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 Covol's
common stock, even though the options convert into restricted stock.

Covol  believes  that the  following  issuances  of shares  of  common  stock or
securities for contingently issuable shares of 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.  Each investor made  representations  to Covol that it was accredited as
that term is defined in  Regulation  D and that the  security  was  acquired for
investment purposes.

Reference is made to the  conversions of series B and series C preferred  stock,
to the  amendments  to the terms of certain  warrants for the purchase of common
stock,  and the issuance of an option for the purchase of common  stock,  all as
described in Note 5 to the consolidated financial statements.

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)   The following exhibits are included herein:

            10.60    Employment Agreement effective April 20, 1999 with
                     Kirk A. Benson

            27.1     Financial Data Schedule

      (b)   No  reports  on Form 8-K were filed during  the three  months  ended
            June 30, 1999.  A Form 8-K was filed on July 7, 1999  relating to an
            event dated June 23, 1999.

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<PAGE>

                                   SIGNATURES

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.



                                  COVOL TECHNOLOGIES, INC.



Date:  August 13, 1999            By: /s/ Kirk A. Benson
                                      ---------------------------------------
                                      Kirk A. Benson, Chief Executive Officer
                                      and Principal Executive Officer



Date:  August 13, 1999            By: /s/ Steven G. Stewart
                                      ----------------------------------------
                                      Steven G. Stewart, Chief Financial Officer
                                      and Principal Financial Officer


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