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 December 31, 1998

                                       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 0-27803

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

           Delaware                                       87-0547337
 (State or other jurisdiction of            (I.R.S. Employer 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
February 12, 1999 was 12,494,029.



<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 December 31, 1998.................................... 3
             Consolidated Statements of Operations - For the three
                  months ended December 31, 1997 and 1998.................. 5
             Consolidated Statement of Changes in Stockholders' Equity -
                  For the three months ended December 31, 1998............. 6
             Consolidated  Statements  of Cash Flows - For the three 
                  months ended December 31, 1997 and 1998.................. 7
             Notes to Consolidated Financial Statements.................... 8

     ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS.....................................17

PART II - OTHER INFORMATION

     ITEM 1. LEGAL PROCEEDINGS.............................................20

     ITEM 2. CHANGES IN SECURITIES.........................................21

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................22

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........22

     ITEM 5. OTHER INFORMATION.............................................22

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................23

SIGNATURES.................................................................24

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

                                                                                                 As of            As of
                                                                                             September 30,     December 31,
(thousands of dollars)                                                                           1998              1998
------------------------------------------------------------------------------------------- ---------------- -----------------

ASSETS

Current assets:
<S>                                                                                                   <C>      <C>
     Cash and cash equivalents                                                                        $ 727     $         675
     Receivables                                                                                      2,879             2,891
     Due from related party                                                                           1,012             1,337
     Inventories                                                                                      1,645             1,805
     Advances on inventories, current                                                                 2,522               990
     Notes receivable - related parties, current                                                        229               235
     Facilities held for sale                                                                        28,405            28,415
     Prepaid expenses and other current assets                                                          682               811
                                                                                            ---------------- -----------------
            Total current assets                                                                     38,101            37,159
                                                                                            ---------------- -----------------

Property, plant and equipment, net of accumulated depreciation                                       14,902            14,976
                                                                                            ---------------- -----------------

Other assets:
     Restricted investments                                                                             748               891
     Advances on inventories, non-current                                                               ---             1,914
     Notes and accrued interest receivable, non-current                                               7,646             7,829
     Notes receivable - related parties, non-current                                                  2,869             2,809
     Intangible assets, net of accumulated amortization                                               3,118             3,617
     Deposits and other assets                                                                          525               846
                                                                                            ---------------- -----------------
            Total other assets                                                                       14,906            17,906
                                                                                            ---------------- -----------------

Total assets                                                                                        $67,909           $70,041
                                                                                            ================ =================
</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)
                                                                                                 As of           As of 
                                                                                             September 30,    December 31,
(thousands of dollars and shares)                                                                 1998            1998
-------------------------------------------------------------------------------------------- --------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                                              <C>              <C>   
     Accounts payable                                                                                $3,036           $3,366
     Due to related party                                                                             1,609            1,870
     Accrued liabilities                                                                              2,858            3,310
     Notes payable, current                                                                          22,049           23,065
                                                                                             --------------- ----------------
            Total current liabilities                                                                29,552           31,611
                                                                                             --------------- ----------------

Long-term liabilities:
     Notes payable, non-current                                                                      13,930           13,973
     Notes and accrued interest payable - related parties, non-current                                  147               69
     Accrued interest payable, non-current                                                              566              157
     Deferred revenues from advance license fees                                                      1,400            1,400
     Deferred compensation                                                                              236              239
                                                                                             --------------- ----------------
            Total long-term liabilities                                                              16,279           15,838
                                                                                             --------------- ----------------
            Total liabilities                                                                        45,831           47,449
                                                                                             --------------- ----------------

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

Commitments and contingencies (Note 7)

Stockholders' equity:
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
      issued and  outstanding  316 shares at September 30, 1998 and 30 shares at
      December 31, 1998
      (aggregate liquidation preference of $3,454 at December 31, 1998)                                   1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and outstanding
      11,272 shares at September 30, 1998 and 12,494 shares at December 31, 1998                         11               12
     Capital in excess of par value - preferred                                                       5,184            3,184
     Capital in excess of par value - common                                                         64,100           71,174
     Accumulated deficit                                                                            (36,177)         (41,073)
     Notes and interest receivable - related parties, from issuance of, or collateralized
      by, common stock, net of allowance                                                             (7,773)          (7,202)
     Deferred compensation from stock options                                                        (3,775)          (3,613)
                                                                                             --------------- ----------------
            Total stockholders' equity                                                               21,571           22,483
                                                                                             --------------- ----------------

Total liabilities and stockholders' equity                                                          $67,909          $70,041
                                                                                             =============== ================
</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 December 31,
(thousands of dollars, except per-share amounts)                                           1997                  1998
---------------------------------------------------------------------------------- --------------------- ---------------------

Revenues:
<S>                                                                                         <C>                    <C>  
     License fees                                                                                $1,000                 $ 474
     Binder sales                                                                                    --                   533
     Binder and coal fine sales - related party                                                       7                   141
     Other                                                                                           34                     7
                                                                                   --------------------- ---------------------
          Total revenues                                                                          1,041                 1,155
                                                                                   --------------------- ---------------------

Operating costs and expenses:
     Cost of coal briquetting operations                                                            457                 3,520
     Cost of binder                                                                                  --                   376
     Selling, general and administrative                                                            741                   929
     Research and development                                                                       156                   153
     Compensation expense on stock options, stock warrants and
          issuance of common stock                                                                  207                   162
                                                                                   --------------------- ---------------------
        Total operating costs and expenses                                                        1,561                 5,140
                                                                                   --------------------- ---------------------

Operating loss                                                                                     (520)               (3,985)
                                                                                   --------------------- ---------------------

Other income (expense):
     Interest income                                                                                122                   831
     Interest expense                                                                            (1,112)               (1,036)
     Minority interest in net losses of consolidated subsidiaries                                    86                    --
     Write-up (write-down) of notes receivable - related parties,
        collateralized by common stock                                                              293                  (571)
     Other                                                                                           15                    24
                                                                                   --------------------- ---------------------
          Total other income (expense)                                                             (596)                 (752)
                                                                                   --------------------- ---------------------

Net loss                                                                                        $(1,116)              $(4,737)
                                                                                   ===================== =====================


Basic and diluted net loss per common share                                                       $(.13)                $(.40)
                                                                                   ===================== =====================
</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
                                   (Unaudited)


                                                                                       
                                                                                              
                                                                                                    Notes and interest 
                                                                                                      receivable -
                                                                                                     related parties,  
                           Convertible Preferred Stock           Common Stock                         from issuance of,    
                        -------------------------------- ----------------------------                 or collater-         Deferred
                                             Capital in                     Capital in                   alized         compensation
(thousands of                                excess of                      excess of   Accumulated    by, common        from stock 
dollars and shares)     Shares     Amount    par value  Shares    Amount    par value     deficit         stock           options
---------------------   ------   ---------  ---------   --------  -------  ----------   -----------     ---------       -----------
<S>                        <C>         <C>     <C>       <C>          <C>     <C>         <C>             <C>              <C>     
Balances at 
September 30, 1998         316         $1      $5,184    11,272       $11     $64,100     $(36,177)       $(7,773)         $(3,775)

Common stock 
issued to purchase
minority interests in                                        92        --         519
subsidiaries

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

Value of common 
stock warrants 
issued under 
terms of
existing debt 
agreement                                                    --        --         247
      
Common stock 
issued for 
rights to 
certain technology                                           60        --         375

Common stock 
issued on 
conversion of
preferred stock                                                 
and accrued but 
undeclared dividends       (286)       --      (2,000)      308        --       2,159         (159)
     
Return of
previously 
issued common 
stock by a director                                         (14)       --          --

Write-down of 
notes receivable - 
related parties                                                                                               571

Amortization of 
deferred 
compensation from 
stock options                                                                                                                  162

Net loss for 
the quarter ended 
December 31, 1998                                                                           (4,737)
                        ------   ---------  ---------   --------  -------  ----------   -----------     ---------       -----------

Balances at 
December 31, 1998           30         $1      $3,184    12,494       $12     $71,174     $(41,073)       $(7,202)         $(3,613)
                        ======   =========  =========   ========  =======  ==========   ===========     =========       -----------
</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)
                                                                                             Three Months Ended December 31,
(thousands of dollars)                                                                           1997                1998
----------------------------------------------------------------------------------------- ------------------- -------------------
     Cash flows from operating activities:
<S>                                                                                                  <C>                 <C>     
     Net loss                                                                                        $(1,116)            $(4,737)
     Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization                                                                      65                 436
       Write-down (write-up) of notes receivable - related parties                                      (293)                571
       Interest expense related to amortization of value of common stock warrants                         --                  82
       Interest expense based upon issuance of convertible debt and warrants at a                      1,112                  --
        discount
       Amortization of deferred compensation from stock options                                          207                 162
       Losses applicable to minority interests in subsidiaries                                           (86)                 --
       Decrease from changes in assets and liabilities, net of effects from investing
             and financing activities                                                                   (858)               (660)
                                                                                          ------------------- -------------------
   Net cash used in operating activities                                                                (969)             (4,146)
                                                                                          ------------------- -------------------

   Cash flows from investing activities:
        Purchase of property, plant and equipment and facilities held for sale                        (4,978)               (410)
        Purchase of rights to technology                                                                  --                (100)
        Issuance of notes receivable                                                                    (812)                 --
        Payments on notes receivable - related parties, current                                           --                  54
        Purchase of restricted investment                                                                 --                (143)
                                                                                          ------------------- -------------------
   Net cash used in investing activities                                                              (5,790)               (599)
                                                                                          ------------------- -------------------

   Cash flows from financing activities:
       Proceeds from issuance of notes payable                                                         3,095               1,049
       Payments on notes payable - related parties                                                       (56)                (78)
       Proceeds from issuance of preferred stock, net                                                     90                  --
       Proceeds from issuance of common stock, net                                                       836               3,774
       Proceeds from receivable - stock subscriptions                                                    577                  --
       Other                                                                                               2                 (52)
                                                                                          ------------------- -------------------
   Net cash provided by financing activities                                                           4,544               4,693
                                                                                          ------------------- -------------------

   Net decrease in cash and cash equivalents                                                          (2,215)                (52)

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

   Total cash and cash equivalents, end of period                                                     $2,565               $ 675
                                                                                          =================== ===================

   Supplemental schedule of non-cash investing and financing activities:
        Common stock issued for purchase of minority interests in subsidiaries                         $  --               $ 519
        Common stock issued on conversion of preferred stock and accrued but undeclared
             dividends                                                                                    --               2,159
        Common stock issued for rights to technology                                                      --                 375
        Note payable issued for inventory                                                                400                  --
        Note payable issued for equipment                                                              1,971                  --
</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's primary business is to commercialize  its binder  technologies 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  companies  that  constructed  facilities  that  convert coal fines into
     synthetic fuel  briquettes.  At December 31, 1998,  Covol and its licensees
     were operating 24 of these  facilities in eight states at various levels of
     production.  The four  Covol-owned  facilities  are  expected to be sold in
     1999.  Covol has no current plans to construct  additional  synthetic  fuel
     facilities.

     Covol anticipates that earned license fees or royalties from the production
     and sale of  synthetic  fuel will  continue to  increase  during  1999.  As
     production  levels increase,  sales of the binder materials by Covol to its
     licensees are expected to increase proportionately.  Covol also anticipates
     receiving the final amounts of advance license fees totaling  approximately
     $4,000,000  during 1999.  Funds received by Covol from these activities are
     not expected to be sufficient to cover Covol's operating costs and expenses
     until the third quarter of 1999.  Covol  anticipates  that these  operating
     activities will be producing operating cash flow by the end of 1999.

     To provide funding for Covol's  operations and debt repayment  requirements
     during early 1999, Covol will utilize proceeds from financing  transactions
     and excess  proceeds from the sale of  facilities.  During  November  1998,
     Covol issued common stock and common stock  warrants for total net proceeds
     of approximately $3,729,000.  During January 1999, Covol issued convertible
     preferred  stock  and  warrants  for total net  proceeds  of  approximately
     $900,000.   Covol  is  presently   negotiating  and  finalizing  definitive
     agreements  with respect to previously  negotiated term sheets for the sale
     of up to  $16,000,000  of additional  convertible  preferred  stock,  which
     financing is expected to close in February  1999.  Covol believes the funds
     raised in these financings and others,  if necessary,  excess proceeds from
     the sale of facilities, and payments for license fees and binder sales will
     be sufficient to fund Covol's  operations and debt  repayment  requirements
     until its operating activities begin producing positive cash flow.

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with the rules and regulations of the Securities and
     Exchange  Commission.  In  the  opinion  of  management,   all  adjustments
     (consisting of normal  recurring  adjustments)  considered  necessary for a
     fair  presentation  have been  included.  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.

     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.

     Certain  prior  period  amounts  have been  reclassified  to conform to the
     December 31, 1998 presentation.  These  reclassifications  had no effect on
     net loss or total assets.

                                       8
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

2.   Advances on Inventories

     During 1997,  Covol  entered  into an agreement to purchase  coal fines and
     through  December  31,  1998  has  made  payments  totaling   approximately
     $3,125,000,  of  which  $221,000  has  been  transferred  to  cost  of coal
     briquetting  operations.  The net amount paid has been recorded as advances
     on  inventories.  Covol  expects to utilize some of these coal fines during
     1999, 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.

3.   Change in Carrying Value of Note Receivable

     During the three  months  ended  December 31,  1998,  Covol  increased  the
     allowance on the $5,000,000  face value note  receivable from a stockholder
     received  from  the  1996  sale  of  certain   construction   companies  by
     approximately $571,000,  which adjusted the carrying value to $1,038,000 as
     of December  31, 1998.  During the three  months  ended  December 31, 1997,
     Covol decreased the allowance by approximately $293,000. 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  note  is  guaranteed  by  the  buyer,  who  is  the  sole
     stockholder  of the  construction  companies,  by 150,625 shares of Covol's
     common  stock held by Covol,  and by options  expiring  in January  2006 to
     acquire 25,000 shares of Covol's common stock  committed by the stockholder
     to be provided to Covol. The allowance is subject to future fluctuations in
     the value of Covol's  common stock.  In February  1999,  Covol  received an
     interest payment of $75,000 from the Note holder.

4.   Notes Payable 
<TABLE>
<CAPTION>

    Notes payable consist of the following:

                                                                                             September 30,        December 31,
   (thousands of dollars)                                                                        1998               1998
  ---------------------------------------------------------------------------------------- ------------------ ------------------
<S>                                                                                               <C>                  <C>
  Note payable to a corporation bearing interest at prime (7.75% at December 31,
  1998) 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  October   1999,
  collateralized by a coal wash plant in Utah.                                                         4,263              4,276

  Notes  payable  to a  corporation,  bearing  interest  at 6%.  50% of  accrued
  interest due February  1999 and balance of accrued  interest and principal due
  February 2001. Collateralized by a synthetic fuel facility in West Virginia,
  held for sale.                                                                                       6,680              6,680

</TABLE>
                                       9
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

4.    Notes Payable, continued 
<TABLE>
<CAPTION>

                                                                                            September 30,    December 31, 1998
    (thousands of dollars, except per-share data)                                               1998
    ------------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                                               <C>                  <C>
    Note payable to a limited liability company issued in conjunction with funds
    advanced for the construction of a synthetic fuel facility in West Virginia,
    held for sale. As of September 30, 1998, the loan was  collateralized by the
    facility, bore no interest and was originally due at the earlier of the sale
    of the facility or January 1999. In December 1998,  this entity modified the
    terms of the note and  agreed  to loan to  Covol  additional  amounts  up to
    $1,500.  This entity had an option to purchase the  facility,  which expired
    unexercised  in January  1999 (see Note 8).  Covol agreed to pay interest on
    all outstanding amounts at a rate of 10%, payable monthly through June 1999.
    Beginning  July 1999  through  May 2000,  monthly  payments  of $350 will be
    required,  with all unpaid principal and interest due June 2000. Also, Covol
    granted  additional  collateral  to the  corporation  in the form of certain
    license fees receivable by Covol from other synthetic fuel facilities.
                                                                                                       8,242              8,895

    Note payable to a corporation,  bearing interest at 15%, collateralized by a
    synthetic  fuel  facility  in  Pennsylvania,  held for sale,  and due at the
    earlier of the sale of the facility or August 1999.                                                5,800              5,800

    Note  payable  to a  corporation  bearing  interest  at 22%,  due June 1999,
    collateralized by a promissory note receivable and by certain future license
    fees  receivable  by Covol.  Warrants to purchase  100,000  shares of common
    stock  were  granted  in October  1998  based on the  outstanding  principal
    balance.  The warrants have an exercise price of $7.44 per share,  expire in
    October 2000 and were valued at approximately  $247,000. A member of Covol's
    Board of Directors is affiliated with this corporation.                                            4,000              4,000

    Note payable to the same corporation referred to in the preceding paragraph,
    bearing  interest at 14%.  Principal  and accrued  interest  due March 1999,
    collateralized  by certain  future license fees  receivable by Covol.                              4,000              4,000

    Other                                                                                                 94                487
                                                                                          ------------------- ------------------
                                                                                                      35,979             37,038
         Less: current portion                                                                        22,049             23,065
                                                                                          =================== ==================
         Total non-current                                                                           $13,930            $13,973
                                                                                          =================== ==================
</TABLE>

   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 11.4% at
   December 31, 1998.

                                       10
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

4.  Notes Payable, continued 

   Interest Costs

   During the three  months  ended  December  31,  1998,  Covol  incurred  total
   interest costs of approximately  $1,036,000 (including  approximately $82,000
   of  amortization  of value of common stock warrants  issued under terms of an
   existing agreement), none of which were capitalized.  During the three months
   ended December 31, 1997, Covol incurred total interest costs of approximately
   $1,397,000 (including  approximately  $1,112,000 of non-cash interest expense
   resulting  from  issuance  of  convertible  debt  at a  discount),  of  which
   approximately $285,000 was capitalized.

5.   Basic and Diluted Loss per Share
<TABLE>
<CAPTION>

  (thousands of dollars and shares, except per-share data)                                   1997               1998
  ----------------------------------------------------------------------------------- ------------------- ------------------

  Numerator:
<S>                                                                                             <C>                <C>     
     Net loss                                                                                   $(1,116)           $(4,737)
     Preferred stock dividends (undeclared)                                                         (88)               (60)
                                                                                      =================== ==================
     Net loss attributable to common stockholders                                               $(1,204)           $(4,797)
                                                                                      =================== ==================

  Denominator - weighted average shares outstanding                                                9,194             11,976
                                                                                      =================== ==================

  Basic and diluted net loss per share                                                            $(.13)             $(.40)
                                                                                      =================== ==================
</TABLE>

6.  Equity Transactions

     Purchase of Limited Partners' Interests in Subsidiaries

   In 1996, Covol formed two limited  partnerships,  Alabama Synfuel #1 Ltd. and
   Utah Synfuel #1 Ltd.,  to assist with the  financing of  construction  at two
   synthetic fuel manufacturing facilities.  These two facilities have been sold
   and are now owned by Birmingham Syn Fuel,  L.L.C.  and Coaltech No. 1 L.P. In
   September 1998,  Covol offered the limited partners in Alabama Synfuel #1 and
   Utah  Synfuel  #1 an  exchange  of  Covol's  common  stock for their  limited
   partnership interests. The exchange ratio was based in part on an independent
   valuation of the limited partnerships' assets and other factors including but
   not limited to current and future expected cash flows of the partnerships and
   the market value of Covol's common stock at the date of the offer,  which was
   $9.00 per share. As of November 10, 1998, all of the limited partners in Utah
   Synfuel #1 and all but one of the limited  partners in Alabama Synfuel #1 had
   agreed to exchange their limited partnership  interests for shares of Covol's
   common  stock,   and  accordingly  Utah  Synfuel  #1  became  a  wholly-owned
   subsidiary of Covol and Alabama  Synfuel #1 became a 98%-owned  subsidiary of
   Covol. Covol recorded this exchange using the market values of Covol's common
   stock on the dates the limited partners tendered acceptance of Covol's offer.
   These market values ranged from $6.75 to $11.13 per share.  The excess of the
   value of the  consideration  paid for the  purchase of the limited  partners'
   interests in subsidiaries  over the fair values of the related assets,  which
   fair values  approximated  their carrying cost, was recorded as an intangible
   asset.

                                       11
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

6.  Equity Transactions, continued

    Sale of Common Stock

    During  November and December 1998,  Covol completed a sale of 745,875 units
    at $5.00 per unit, for total proceeds of approximately $3,729,000. Each unit
    consisted  of one  share of  restricted  common  stock,  plus a  warrant  to
    purchase  one  additional  share of  restricted  common stock at an exercise
    price of $7.50  per  share.  The  warrants  expire in  November  1999 if not
    exercised.  Covol provided piggyback  registration rights for the restricted
    common shares and the shares issuable upon exercise of the warrants.

    Technology Acquisition

    Effective  in November  1998,  Covol  acquired a coal-based  synthetic  fuel
    technology,  and related  licensing  and patent rights for $100,000 in cash,
    60,000 shares of restricted common stock valued at $375,000 and a commitment
    to make  installment  payments  of $5,000 per month for 60 months if certain
    events occur.  This  acquisition  transferred to Covol patent  ownership and
    licensor  rights and  obligations  to  existing  license  agreements  with a
    company that  sublicensed  the  technology to a developer of four  synthetic
    fuel facilities. In connection with the acquisition of the technology, Covol
    entered into a consulting  agreement  with the previous  owner of the patent
    rights  to  provide  consulting  services  related  to  iron  revert,  coke,
    charcoal,  waste recycling,  and other related applications.  The consulting
    agreement provides for monthly payments of $7,500 through November 2001. The
    total cost of  $475,000 is being  amortized  on a  straight-line  basis over
    approximately nine years.

    Preferred Stock Conversion

    In October 1998, a total of approximately 308,000 shares of the common stock
    were  issued  on  conversion  of  approximately  286,000  shares of series B
    preferred stock and related accrued but unpaid dividends.

    Return of Stock Issued to Director

    Covol  previously  issued  34,000  shares of common  stock to a director  as
    compensation for services and financial assistance.  Following  negotiations
    between Covol and this  director,  14,000 shares of stock were  cancelled in
    December  1998.  Reference  is made  to  paragraph  7 in  "Recent  Sales  of
    Unregistered Securities" in Part II, Item 1. for a more detailed description
    of this transaction.

    Stock Options

    During the quarter ended  December 31, 1998,  Covol granted  options for the
    purchase  of a total of  322,000  shares of common  stock.  Options  for the
    purchase of 150,000  shares of common stock were  granted to three  officers
    and  options  for the  purchase  of  172,000  shares  were  granted  to four
    independent  directors.  In addition to these grants, in January 1999, Covol
    granted  options for the  purchase of 60,000  shares of common stock to four
    individuals  for services  rendered in  connection  with the  financing of a
    synthetic  fuel  facility  pursuant to a consulting  arrangement  originally
    entered into in 1997 and revised in August  1998.  In December  1998,  three
    officers  exercised  options  for the  purchase  of 30,000  shares of common
    stock, for which Covol received proceeds of $45,000.

                                       12
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                                   (Unaudited)
                                   ----------
7.  Commitments and Contingencies

    Commitments  and  contingencies  as  of  December  31,  1998  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 December 31, 1998, there was $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 December 31, 1998
    is $755,000  related to  construction  contracts  that contain a "failure to
    proceed" liability clause.

    In  December  1996,  Covol  entered  into   indemnification   agreements  in
    connection with construction contracts for certain synthetic fuel facilities
    entered into  between the  construction  contractor  and  independent  third
    parties.  These  contracts  call for  liquidated  damages  of  $750,000  per
    contract if  construction  of the  facilities  were not completed by June 1,
    1998. Covol indemnified the contractor for these potential liabilities.  The
    maximum  contingent  liability  Covol may have under  these  indemnification
    agreements  would be $2,250,000.  The contractor and the  contracting  party
    have  initiated   arbitration   against  each  other  including  claims  for
    liquidated damages. Covol is closely monitoring the arbitration and believes
    that payment of a material amount by Covol is unlikely.

    In March  1997,  Covol sold the Utah  Synfuel #1 facility  to  Coaltech.  In
    connection with this sale, Utah Synfuel #1 licensed  Coaltech to use Covol's
    binder  technologies  for an advance license fee of $1,400,000 and an earned
    license fee that is payable quarterly and is based upon briquette production
    and sales from the Utah Synfuel #1 facility.  Covol contracted with Coaltech
    to operate the facility for which Covol  receives a quarterly  fee, which is
    also based upon briquettes produced and sold. Coaltech has an option wherein
    they can require Covol to purchase this  facility  under certain  conditions
    for a price equal to fair market value, but not to exceed 50% of the amounts
    paid to Covol by  Coaltech.  Additionally,  Covol  entered into a supply and
    purchase  agreement  wherein  Covol agreed to provide coal fines to Coaltech
    for  processing  into  synthetic  fuel at a price  equal to its cost.  Covol
    agreed to purchase from  Coaltech the synthetic  fuel produced at Coaltech's
    cost plus one dollar per ton.  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 in total the  earned  license  fees will  exceed  the  losses
    incurred  under the supply and  purchase  agreement.  Because of the initial
    expected   losses  under  this  supply  and  purchase   agreement,   revenue
    recognition of the advance license fee has been deferred as of September 30,
    1998 and December 31, 1998.

    In June 1996,  Covol formed Alabama Synfuel #1 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 a dispute with the provider of the coal fines,  the  resolution of which
    is not expected to have a material impact on Covol.

    In May 1995,  Covol  entered into an agreement  with Geneva Steel Company to
    build and  operate a  commercial  briquetting  plant.  The  facility  is not
    currently  operational  and is  expected to be moved from the Geneva site in
    the  near  future.  Covol  may use  this  equipment  for the  production  of
    synthetic  fuel  or for  testing  purposes. 

                                       13
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

7.  Commitments and Contingencies, continued

    Legal or Contractual Matters, continued

    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 a reduction in the license fees
    payable to Covol under the license  agreements.  Upon condition of immediate
    payment by Pace of advance  license  fees,  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.  Covol's loan to Pace will be repaid 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 two quarterly loans totaling  $1,500,000.  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 and December
    31, 1998, which amounts are believed to be approximately $612,000 in total.

    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.

    As of  September  30,  1998  and  December  31,  1998,  Covol  has  recorded
    liabilities  to  The  Industrial  Company  ("TIC")  totaling   approximately
    $735,000.  In November 1998, Covol was served with liens from TIC in amounts
    totaling  approximately  $1,150,000 for construction payments TIC claims are
    due for certain synfuel  facilities.  Covol is negotiating  with TIC for the
    settlement  and release of the liens and believes that payment of a material
    amount beyond what has been accrued by Covol is unlikely.

    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.  Covol and
    Coalco  are  negotiating  to  attempt  to  resolve  their  differences.  The
    potential liability to Covol, if any, is not known. While Covol's management
    believes  the  dispute  will be  resolved  and will  not have a  significant
    financial  impact,  it can give no assurance  as to the  ultimate  effect on
    Covol. Pelletco, an affiliate of Coalco, is a licensee of Covol.

    Covol is also involved in several legal  proceedings that have arisen out of
    the normal course of business.  Covol believes that many of these claims are
    without merit and in all cases intends to vigorously  defend their position.
    Management does not believe that the outcome of these activities will have a
    significant effect upon the operations or the financial position of Covol.

                                       14
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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


7.  Commitments and Contingencies, continued

    Employment Contract

    In January 1999, Covol entered into an employment agreement with an officer.
    This  agreement  has a term of three years and provides for annual  salaries
    and benefits ranging from approximately  $107,000 to $142,000. The agreement
    provides for  termination  benefits under  specific  conditions of an amount
    equal to one year's annual base salary.

8.  Events Subsequent to December 31, 1998

    Events  subsequent  to December  31,  1998 not  disclosed  elsewhere  are as
    follows:

    Sale of Series C Convertible Preferred Stock

    During  January  1999,  Covol  completed  a  financing  transaction  with  a
    stockholder  that  consisted  of the sale of 1,000 shares of a new series of
    non-voting preferred stock,  designated as Series C 7% Convertible Preferred
    Stock.  Covol  received  $900,000 in net proceeds  from the issuance of this
    preferred stock, which has the following rights and privileges:

    o         Dividends on the preferred stock are cumulative and accrue whether
              or not they have been  declared or whether  Covol has any profits.
              The  dividend  rate is 7% per  year of the  liquidation  value  of
              $1,000 per share.
    o         The  preferred   stock  is  convertible   into  common  shares  in
              incremental  stages  beginning  April 1999 through  July 1999,  at
              which  time all of the  outstanding  shares  may be  converted  to
              common  stock.  The number of common  shares to be  received  upon
              conversion is determined  by  multiplying  the number of preferred
              shares by $1,000 and dividing that number by the conversion  price
              (currently   $5.50  per  share,   subject  to  adjustment).   Upon
              conversion,  all  accrued  and  unpaid  dividends  will be paid or
              converted into shares of common stock.
    o         Covol may at its option  redeem the  outstanding  preferred  stock
              beginning  July 1999 for a  redemption  price equal to 125% of the
              liquidation value plus any accrued and unpaid dividends thereon.

    Warrants  for the  purchase of 72,727  shares of common stock were issued in
    conjunction with this preferred  stock.  These warrants are exercisable from
    April  1999  through  July 2001 at an  exercise  price of $6.88  per  share,
    subject to adjustment. The exercise deadline for certain other warrants with
    an exercise price of $7.00 per share held by this  stockholder were extended
    to June 2000 and  certain  additional  warrants  with an  exercise  price of
    $30.00 per share were  relinquished  and have been cancelled.  Covol granted
    registration   rights  for  the  restricted   common  shares  issuable  upon
    conversion  of the  preferred  stock or upon  exercise  of the common  stock
    warrants.

                                       15
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

7.  Commitments and Contingencies, continued

    Other

    Covol  is  presently  finalizing   definitive  agreements  with  respect  to
    previously  negotiated  term  sheets  for the sale of up to  $16,000,000  of
    additional convertible preferred stock, which financing is expected to close
    in February 1999.

    In May 1998,  Covol  entered into a  construction  and  operation  financing
    agreement and a purchase option agreement to sell the Mountaineer  synthetic
    fuel facility to Mountaineer  Synfuel,  L.L.C., a Delaware limited liability
    company.  The purchase option expired unexercised on January 29, 1999. Under
    the financing agreement, Covol is obligated to repay the loan (approximately
    $8,895,000 at December 31, 1998 and $9,191,000 at January 29, 1999) with ten
    percent interest in monthly interest only installments through June 1999 and
    monthly principal and interest installments  thereafter of $350,000,  with a
    balloon payment on June 30, 2000. Alternatively, if Covol sells the facility
    before  the loan  repayment  date,  Covol  must  repay  the loan  from  sale
    proceeds.  Covol continues to operate the project under contract with Savage
    Industries  Inc.  Anker  Energy  Corporation   supplies  the  facility  with
    feedstock and provides  marketing  services for the synthetic fuel produced.
    Covol is  actively  seeking a purchaser  for the  Mountaineer  facility  and
    expects  the  facility to be sold in its fiscal  year 1999.  However,  Covol
    cannot give assurance that it will successfully sell the facility.

                                       16
<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 December 31, 1998 Compared to Three Months Ended December 31,
1997

         Revenues.  Total  revenues for the three months ended December 31, 1998
("1998")  increased by $114,000 to $1,155,000 as compared to $1,041,000  for the
three months ended December 31, 1997  ("1997").  During 1998,  Covol  recognized
license fees totaling  $474,000 while license fees of $1,000,000 were recognized
during 1997. The license fees in 1998 consisted solely of earned license fees or
royalty payments,  substantially all of which were from a single licensee, while
the license fees in 1997  consisted  solely of one-time  advance  license  fees.
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 expects to receive  approximately
$4,000,000  of  additional  advance  license  fees  during 1999 upon the sale of
certain  synthetic  fuel  facilities  currently  owned  by  Covol  and  upon the
achievement  of  certain   production  levels  at  two  of  the  synthetic  fuel
facilities.  Earned license fees or royalty payments are expected to increase at
a moderate level in the near term with significant increases expected during mid
to late 1999.

         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
during 1998 were $533,000 with a corresponding direct cost to Covol of $376,000.
Covol had sales of binder and coal fines to a related party during 1998 totaling
$141,000 compared to $7,000 during 1997. These revenues resulted  primarily from
coal fines that were sold to the related  party at Covol's  cost as provided for
under the binder and license agreement with this party.

         Covol expects an increase  during 1999 of production of synthetic  fuel
by its  licensees as  licensees  improve  production  capability  and  establish
marketing  agreements  for end  product.  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  licensees  must  successfully  obtain
adequate  feedstock coal fines,  process fines into synthetic  fuel, and develop
markets  for  synthetic  fuel.  Covol  believes  that its  licensees  have  made
significant  progress in these areas during the quarter ended December 31, 1998,
but continued success cannot be assured.

         Operating Costs and Expenses. Operating costs and expenses increased by
$3,579,000 to $5,140,000  during 1998 from $1,561,000  during 1997. Cost of coal
briquetting  operations  accounted  for most of this  variance  as  these  costs
increased $3,063,000 from $457,000 during 1997 to $3,520,000 during 1998. During
1998, 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 and synthetic  fuel plant
located in Utah,  discussed  below,  costs  incurred in providing  assistance to
Covol's  licensees  during the ramp-up of their synthetic fuel  facilities,  and
increased  personnel costs. Covol expects to continue incurring losses into 1999
until the four facilities  which it owns are sold, but expects to realize a gain
from these sales.

         Covol  operates one of the synthetic fuel  facilities  for Coaltech,  a
partnership  for  which  Covol is the  general  partner.  Under  this  operating
agreement,  Covol is  contractually  obligated to purchase all of the  synthetic
fuel produced by Coaltech at cost plus $1 per ton.  Production of synthetic fuel
from this facility during 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
$1,150,000  during 1998 and $240,000 during 1997.  Covol expects the excess cost
per ton to decrease in 1999 as production volumes increase.

                                       17
<PAGE>

         Selling,  general and administrative expenses increased $188,000 or 25%
to $929,000  during 1998 from  $741,000  for 1997.  The  largest  components  of
selling,  general and  administrative  expenses for both  periods were  payroll,
professional services and travel expenses. Payroll costs increased approximately
$45,000 and professional services increased approximately $172,000, while travel
costs  decreased  approximately  $37,000.  Most of the increase in  professional
services was due to increased legal costs.

         Research and development costs decreased  marginally during 1998. Covol
expects  that  research  and  development  costs will  increase in 1999 as Covol
focuses resources on further refinement of its binder  technologies  relative to
the synthetic fuel industry and the application of its binder  technologies into
other areas.

         Compensation expense on stock options,  stock warrants, and issuance of
common stock decreased $45,000 to $162,000 for 1998 from $207,000 for 1997. 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. This amount is expected to remain relatively level.

         Other Income and Expense.  During 1998, Covol had net other expenses of
$752,000  compared  to $596,000  for 1997.  This  increase  of $156,000  relates
primarily  to a  change  between  periods  of  $864,000  in  the  mark-to-market
adjustment   of  the   carrying   value  of  related   party  notes   receivable
collateralized by common stock, offset in part by an increase in interest income
of $709,000.

         During 1996, Covol sold certain construction  companies and received as
consideration a $5,000,000 note receivable  ("Note") with interest at 6% payable
over five years.  It was  determined  that the Note should be  discounted  to an
appropriate  market  rate and  accordingly,  the Note was  discounted  at 10.25%
resulting in a discount of  $1,281,000.  The Note is  guaranteed by the buyer of
the construction  companies and is  collateralized by stock and stock options of
Covol.  Accordingly,  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 $571,000  during  1998,  compared to a write-up of $293,000  during  1997.  A
$515,000  payment  on the Note was due in January  1999,  of which  $75,000  was
received.  The balance of the January  payment is expected to be received in the
quarter  ending March 31, 1999.  As of December 31, 1998 the Note had a carrying
value of $1,038,000. Included in interest income for 1998 is $515,000 related to
this Note.

         Interest  expense in 1997  consisted  solely of expense  based upon the
issuance of convertible  debt and warrants at a discount.  During December 1997,
Covol executed an amendment to a loan agreement with a licensee,  which provided
funding for completing  construction of a synthetic fuel facility in Alabama and
acquiring  coal  fines and for  other  purposes  related  to the  facility.  The
modification  increased the amount available for borrowing with a provision that
borrowings  were  convertible  into  common  stock  under the same  terms as the
original  agreement.  Based on the revised  terms,  an expense of  approximately
$714,000 was  recognized  during the quarter for  conversion  rights issued at a
price below  market.  In October  1997,  Covol  entered into an  agreement  with
another  licensee  whereby  the  licensee  agreed to finance a wash plant  being
constructed  by Covol to provide  washed coal fines to a synthetic fuel facility
in  Utah.  As  additional  consideration  to  the  licensee  for  the  financing
arrangement, Covol granted warrants to purchase Covol common stock, resulting in
the recognition of  approximately  $398,000 of interest expense in that quarter.
Interest  expense in 1998 consists of interest  accrued on notes payable used to
finance the  construction  of synthetic  fuel  facilities  held for sale and for
operating  needs and includes  $82,000 of  amortization of value of common stock
warrants issued under terms of an existing debt agreement.  Interest  expense is
expected to decrease after the repayment of debt related to 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
$86,000  in 1997 to  approximately  $0 in  1998.  Covol  believes  the  combined
operations  of  these  partnerships  will  result  in  operating  losses  in the
near-term  future,  which  losses  will be  included  in  Covol's  statement  of
operations.

                                       18
<PAGE>

         Net  loss.  For  1998,  the  net  loss  increased  by  $3,621,000  from
$1,116,000  for  1997  to  $4,737,000.  The  increase  is  primarily  due to the
significant increase in the cost of briquetting operations,  which was partially
offset by  increased  interest  income as  discussed  previously.  Covol did not
recognize  any income tax benefit in 1998 or 1997 since the  realization  of its
deferred tax asset,  consisting  primarily of net operating loss  carryforwards,
depends 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  either  under  option to  purchase  or are being  offered  for sale.  Covol
anticipates sale of these facilities  during the year ending September 30, 1999.
The majority of the funds received from 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 activities  relative to the completion of
the other synthetic fuel facilities.

         Net cash  used in  operating  activities  increased  by  $3,177,000  to
$4,146,000  during 1998 from  $969,000  during 1997.  Covol was 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 related common stock
warrants.  During  1998,  proceeds  from the issuance of notes  payable  totaled
approximately $1,049,000 and issuances of common stock totaled $3,774,000.

         Capital  Resources.  During the quarter ended December 31, 1998,  Covol
used  net  cash  in its  investing  activities  totaling  $599,000  compared  to
$5,790,000 for 1997. These uses consisted  principally of purchases of property,
plant and  equipment.  In 1997, a major portion of the purchases  related to the
four facilities  currently held for sale. Covol believes that funds required for
investing  activities  will  be  significantly  less  during  1999  because  the
construction  of  facilities  that produce  synthetic  fuel that  qualifies  for
federal  income tax credits  under Section 29 of the IRC were  completed  during
fiscal 1998.

         Covol  anticipates  that  earned  license  fees or  royalties  from the
production and sale of synthetic fuel will continue to increase  during 1999. As
production  levels  increase,  sales  of the  binder  materials  by Covol to its
licensees  are  expected to  increase  proportionately.  Covol also  anticipates
receiving  the final  amounts of advance  license  fees  totaling  approximately
$4,000,000  during 1999.  Funds received by Covol from these  activities are not
expected to be sufficient to cover Covol's  operating  costs and expenses  until
the third quarter of 1999.  Covol  anticipates  that these operating  activities
will be producing operating cash flow by the end of 1999.

         To  provide   funding  for  Covol's   operations   and  debt  repayment
requirements  during early 1999,  Covol will  utilize  proceeds  from  financing
transactions  and excess  proceeds from the sale of facilities.  During November
1998, Covol issued common stock and common stock warrants for total net proceeds
of  approximately  $3,729,000.  During  January 1999,  Covol issued  convertible
preferred stock and warrants for total net proceeds of  approximately  $900,000.
Covol is presently negotiating and finalizing definitive agreements with respect
to  previously  negotiated  term  sheets  for the sale of up to  $16,000,000  of
additional  convertible preferred stock, which financing is expected to close in
February 1999.  Covol believes the funds raised in these  financings and others,
if  necessary,  excess  proceeds from the sale of  facilities,  and payments for
license fees and binder sales will be sufficient to fund Covol's  operations and
debt  repayment  requirements  until its operating  activities  begin  producing
positive cash flow.

Forward Looking Statements

         Statements  in this Item 2  regarding  Covol's  expectations  as to the
financing,  development  and operation of facilities  utilizing  Covol's  binder
technologies,  the receipt of licensing and royalty fees, revenues,  the receipt
of fees for sale of binder  materials,  and other  information  presented herein
that are not purely historical by 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 knowledge of its business and  operations,
there can be no assurance  that actual results will not differ  materially  from
its expectations.  In addition to matters affecting Covol's industry or the coal

                                       19
<PAGE>

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 in part, the following:

   o     the  ability  of  licensees to  produce and sell  synthetic  fuel at or
         near the rated  capacity  of the synthetic fuel facilities;
   o     ability to obtain  needed additional  capital on  terms  acceptable  to
         Covol;
   o     changes in  governmental  regulation or failure to comply with existing
         regulations   which  may  result  in   operational   shutdowns  of  its
         facilities; and
   o     the availability of tax credits under Section 29 of the tax code.

         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.

Year 2000 Issues

         The year 2000 issue  results  from  computer  programs  and  electronic
circuitry that do not differentiate  between the year 1900 and year 2000 because
they are written  using  two-digit  rather than  four-digit  dates to define the
applicable  year. Many computer  applications and  date-sensitive  devices could
fail or produce erroneous results when processing data after December 31, 1999.

         Covol does not have any  computer  applications  that it  believes  are
mission critical to the operation of synthetic fuel facilities that it operates.
While Covol has not formally  verified Year 2000  compliance with licensees that
utilize Covol's  technology in their synthetic fuel  facilities,  it is believed
that the computer  applications  used in the operations of these  facilities are
not mission critical. Accordingly, it is believed that Year 2000 issues will not
be significant  to these computer  applications  and  accordingly,  upgrading or
modifications to these applications to make them Year 2000 compliant will not be
significant.

         During fiscal year 1998,  Covol upgraded its network  operating  system
and  believes  that  system  is Year  2000  compliant  and that  any  additional
upgrading  to that  system  will not be  significant.  Covol  utilizes  computer
applications  in the finance and  accounting  departments  and in the  corporate
office that  utilize a two-digit  date that will need to be upgraded in order to
be Year 2000  compliant.  Covol has contacted the providers of this software and
they have indicated that Year 2000 compliant software will be available in early
1999. Covol believes the cost to purchase this upgraded  software and to convert
the  applicable  applications  to this new software  will be less than  $50,000.
Covol anticipates that this conversion will be completed by June 30, 1999.

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.

                                       20
<PAGE>

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.

         Indemnification to Centerline. In December 1996, Covol entered into six
indemnification  agreements  with  Centerline  whereby Covol agreed to indemnify
Centerline  should it be required to pay liquidated  damages to PacifiCorp under
various design and  construction  agreements for six synthetic fuel  facilities.
Under the original terms of the various design and construction  agreements,  if
the  facilities  were not  completed by June 1, 1998 then $750,000 in liquidated
damages  for  each  facility  would  be  due  and  payable  by  Centerline.  The
indemnification  agreement only applied if PacifiCorp  actually decided to build
the facilities with Centerline as the design/builder.  PacifiCorp elected to not
build three of the projects,  and therefore the indemnity agreement with respect
to those  facilities  no longer  applies.  Accordingly,  the  maximum  amount of
contingent liability to Covol under the indemnification agreements is $2,250,000
($750,000 per design and  construction  agreement).  Counsel for  Centerline has
notified Covol that a dispute exists between  Centerline and  PacifiCorp,  which
may require indemnification by Covol. Covol has been advised that the dispute is
proceeding to arbitration.

ITEM 2.     CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

         The following sets forth all securities issued by Covol within the past
fiscal  quarter and  subsequent  to December  31, 1998 without  registering  the
securities  under the Securities Act of 1933, as amended.  No underwriters  were
involved in any stock issuances.

         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  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.

         In 1996, Covol formed two limited partnerships, Alabama Synfuel #1 Ltd.
and Utah Synfuel #1 Ltd.,  to assist with the financing of  construction  at two
synthetic fuel manufacturing facilities. These two facilities have been sold and
are now  owned by  Birmingham  Syn  Fuel,  L.L.C.  and  Coaltech  No. 1 L.P.  On
September 9, 1998,  Covol offered the limited partners in Alabama Synfuel #1 and
Utah  Synfuel  #1  an  exchange  of  Covol's  common  stock  for  their  limited
partnership  interests.  The exchange  ratio was based in part on an independent
valuation of the limited  partnerships'  assets and other factors  including but
not limited to current and future  expected  cash flow of the  partnerships  and
current market values of Covol's common stock as quoted on NASDAQ.  The exchange
ratio for Utah  Synfuel #1 was 112.828  shares of common  stock per each limited
partnership  unit  and  125.97  shares  for  each  Alabama  Synfuel  #1  limited
partnership unit. The limited partnerships' units originally sold for $1,000 per
unit.

         As of November 10, 1998, all of the limited partners in Utah Synfuel #1
and all but one of the  limited  partners  in  Alabama  Synfuel #1 had agreed to
exchange their limited partnership interests for shares of Covol's common stock,
and  accordingly  Utah Synfuel #1 became a wholly-owned  subsidiary of Covol and
Alabama Synfuel #1 became a 98%-owned subsidiary of Covol.

         During  November 1998,  Covol  completed a financing  transaction  that
consisted of $400,000 of debt and  approximately  $3,500,000 of equity issued to
28 investors.  The debt had a term of twelve  months,  bears interest at 15% per
annum,  with an interest  only payment due in six months and with the balance of
interest and principal due at maturity.  The debt is  collateralized  by certain
assets of Covol and is due prior to maturity  upon the  placement  of  long-term

                                       21
<PAGE>

financing by Covol. The equity transaction  consisted of the sale of a unit at a
price of $5.00.  A unit  consisted  of one share of  restricted  common stock of
Covol plus a warrant to purchase one additional share of restricted common stock
at an  exercise  price of $7.50.  The  warrants  expire in twelve  months if not
exercised.  The stock and shares issuable  pursuant to the related warrants bear
"piggyback" registration rights.

         In March 1996,  Raymond G.  Weller made a personal  loan of $459,250 to
Covol at the  request  of  Covol's  then CEO and CFO at a time when Covol was in
great financial need. This loan was repaid in 1996 through the issuance of Covol
common stock to Mr. Weller. It appears that the then management  committed Covol
to issue to Mr. Weller up to 34,000 shares of Covol common stock as compensation
for the personal risk taken by Mr. Weller. The CEO and CFO left Covol in October
1996 before the transaction was completed. Mr. Weller continued to support Covol
and  provided  leadership  and  guidance  as a  director  through  the period of
transition   between  prior  and  current   management.   After  confirming  the
circumstances surrounding the transaction, Covol's current management negotiated
a resolution of the matter with Mr. Weller,  and approved the issuance of 20,000
shares of restricted stock in complete  satisfaction of any obligation Covol may
have to Mr. Weller with respect to this transaction.  The Board has approved the
resolution. 

         On December 3, 1998,  Covol issued  60,000 shares of Covol common stock
to a single investor as partial  consideration  for the purchase of a patent and
related  intellectual  property rights with respect to an alternative  method of
production of solid synthetic fuel.

         In January 1999, Covol issued to four accredited investors, pursuant to
a consulting  compensation  agreement dated August 1998,  options to purchase an
aggregate of 60,000 shares of Covol common stock, at an exercise price of $12.75
per share. The exercise price will be reduced to $8.58 per share if a consulting
fee is not paid to the  accredited  investors  as set  forth  in the  consulting
compensation  agreement.  The options are nontransferable and include piggy-back
registration  rights,  which  may  be  exercised  two  times.  The  options  are
exercisable until August 2003, after which any unexercised options will expire.

         Reference is made to the sale of series C convertible  preferred  stock
described in Note 8 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

Technology Acquisition

         Effective  as  of  November  10,  1998,  Covol  acquired  a  coal-based
synthetic fuel technology known as  Carbontite(R),  along with related licensing
and patent  rights owned by Dr. James G.  Davidson and Adtech,  Inc.,  including
U.S. Patent No.  5,238,692.  This acquisition  transferred to Covol, in exchange
for  $100,000 and the issuance of 60,000  shares of Covol common  stock,  patent
ownership and licensor  rights and  obligations to existing  license  agreements
with Carbontech Energy  Corporation  ("CEC"),  which in turn has sublicensed the
technology  to  Carbontronics,  the developer of the  following  synthetic  fuel
facilities:

         Location                         Rated Annual Capacity
         Gibraltar, KY                         600,000 tons
         Lynnville, IN                         600,000 tons
         Metropolis, IL                      1,200,000 tons

                                       22
<PAGE>

         The  Gibraltar,   Kentucky  and  Lynnville,   Indiana   synthetic  fuel
facilities  are located at Peabody  coal mine sites and are operated by Peabody.
The  Metropolis  facilities  are located at the Cook coal  terminal  operated by
American Electric Power.

         As the  owner  of the  Carbontite(R)  technology  and  related  license
rights,  Covol  is to  receive  from  CEC a share of the  license  fees  paid to
Carbontec by  sublicensees,  plus a  prescribed  royalty per ton of the finished
product  sold  in  plants  operated  by CEC or its  sublicensees.  The  existing
assigned  license  agreements  do not  provide  for sale of  chemical  binder to
licensees.

         In connection  with the  acquisition of the  Carbontite(R)  technology,
Covol  entered  into  a  consulting  agreement  with  Dr.  Davidson  to  provide
consulting services related to iron revert, coke, charcoal, waste recycling, and
other related  applications.  In addition,  Dr. Davidson granted rights to Covol
for implementation of other technologies  related to the business  activities of
Covol.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following exhibits are included herein:

         3.1.5       Certificate   of   Designation,   Number,   Voting  Powers,
                     Preferences  and Rights of Covol's  Series C 7% Convertible
                     Preferred Stock.
         10.56       Employment Agreement effective April 21, 1998 with Brent M.
                     Cook.
         10.57       Employment Agreement effective January 1, 1999  with Steven
                     R. Brown.
         27.1        Financial Data Schedule

(b) No reports on Form 8-K were filed during the three months ended December 31,
1998.

                                       23
<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:  February 12, 1999                      By: /s/ Brent M. Cook 
                                                  --------------------------
                                                  Brent M. Cook, Chief Executive
                                                  Officer and Principal 
                                                  Executive Officer


Date:  February 12, 1999                      By: /s/ Steven G. Stewart
                                                  --------------------------
                                                  Steven G. Stewart, Chief      
                                                  Financial Officer and 
                                                  Principal Financial Officer

                                       24