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

                                    FORM 10-Q
(Mark One)

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

For the quarterly period ended March 31, 1998

                                       OR

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

                For the transition period from _________________

                         Commission file number 0-27803

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

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

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

                                 (801) 768-4481
              (Registrant's telephone number, including area code)
 -----------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

      Class of Stock                                  Amount Outstanding
      --------------                                  ------------------
$.001 par value Common Stock                10,432,192 Shares of Common Stock
                                                       at May 7, 1998
<PAGE>

                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                        Page No.

PART I - FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL INFORMATION (Unaudited).......................... 3
                  Consolidated Balance Sheets - As of March 31, 1998 and
                    September 30, 1997
                  Consolidated Statements of Operations - For the three 
                    months ended March 31, 1998 and 1997 and for the 
                    six months ended March 31, 1998 and 1997
                  Consolidated  Statements  of Cash  Flows - For the 
                    six months ended March 31, 1998 and 1997
                  Notes to Financial Statements
         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS........................16
         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK.......................................................23

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS..........................................23
         ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS..................24
         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES............................25
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........25
         ITEM 5.  OTHER INFORMATION..........................................25
         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K...........................25

EXHIBIT 27.1      FINANCIAL DATA SCHEDULE....................................27




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

                                        2
<PAGE>
<TABLE>
<CAPTION>

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



                                                                                     As of              As of
                                                                                   March 31,        September 30,
                                                                                     1998                1997
         ASSETS                                                                 ---------------    ----------------

Current assets:
<S>                                                                             <C>                <C>
   Cash and cash equivalents                                                    $       558,682    $      4,780,301
   Receivables                                                                          396,757              12,595
   Receivable - stock subscriptions                                                           0             577,500
   Inventories                                                                        1,548,083           1,818,991
   Advances on inventories                                                            1,989,772           1,086,964
   Notes receivable - related parties, current                                          346,395             275,516
   Prepaid expenses and other current assets                                            224,433              51,865
                                                                                ---------------    ----------------
Total current assets                                                                  5,064,122           8,603,732
                                                                                ---------------    ----------------
Property, plant and equipment, net of accumulated depreciation                       29,851,003          13,619,271
                                                                                ---------------    ----------------
Other assets:
   Notes receivable                                                                   7,757,290                   0
   Notes receivable - related parties, non-current                                    3,627,129           3,816,604
   Deposits and other assets                                                            605,607             321,207
                                                                                ---------------    ----------------
Total other assets                                                                   11,990,026           4,137,811
                                                                                ---------------    ----------------
Total assets                                                                    $    46,905,151    $     26,360,814
                                                                                ===============    ================
</TABLE>

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

                                        3
<PAGE>
<TABLE>
<CAPTION>

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



                                                                                     As of              As of
                                                                                   March 31,        September 30,
                                                                                     1998                1997
         LIABILITIES AND STOCKHOLDERS' EQUITY                                   ---------------    ----------------

Current liabilities:
<S>                                                                             <C>                <C>
   Accounts payable                                                             $       641,159    $      1,045,147
   Payable for coal briquetting equipment                                             3,121,003           1,967,686
   Due to related party                                                                 454,294           1,038,667
   Accrued liabilities                                                                  521,410           1,023,126
   Accrued contractor liability                                                       1,056,500           1,477,000
   Advance on binder facilities                                                         790,703                   0
   Convertible debentures, current                                                    1,000,000           3,302,422
   Notes payable, current                                                             2,536,679           1,945,104
                                                                                ---------------    ----------------
Total current liabilities                                                            10,121,748          11,799,152
                                                                                ---------------    ----------------
Long-term liabilities:
   Accrued interest                                                                     329,353             204,402
   Notes payable, non-current                                                        15,028,325           2,900,000
   Notes payable - related parties, non-current                                         146,588             489,096
   Deferred revenues from advance licensing fees                                      1,650,000           1,650,000
   Deferred compensation                                                                229,752             223,891
                                                                                ---------------    ----------------
Total long-term liabilities                                                          17,384,018           5,467,389
                                                                                ---------------    ----------------
Total liabilities                                                                    27,505,766          17,266,541
                                                                                ---------------    ----------------
Minority interest in consolidated subsidiaries                                        3,028,118           3,165,996
                                                                                ---------------    ----------------
Commitments and contingencies (Note 10)

Stockholders' equity:
   Preferred stock:  $0.001 par value; authorized 10,000,000 shares,
     issued and outstanding,  315,882 shares at March 31, 1998 and
     303,024 shares at September 30, 1997                                                   316                 303
   Common stock:  $0.001 par value; authorized 25,000,000 shares,
     issued and outstanding, 10,256,175 shares at March 31, 1998 and
     8,627,290 shares at September 30, 1997                                              10,256               8,627
   Common stock to be issued: 63,060 shares at March 31, 1998 and
     462,285 shares at September 30, 1997                                                    63                 462
   Capital in excess of par value - preferred                                         5,184,626           5,094,634
   Capital in excess of par value - common                                           55,104,729          41,818,549
   Capital in excess of par value - common stock to be issued                           417,638           3,291,783
   Accumulated deficit                                                             (32,376,300)        (32,191,556)
   Notes and interest receivable - related parties from issuance of or
       collateralized by common stock (net of allowance)                            (7,701,798)         (7,411,278)
   Deferred compensation from stock options                                         (4,268,263)         (4,683,247)
                                                                                ---------------    ----------------
Total stockholders' equity                                                           16,371,267           5,928,277
                                                                                ---------------    ----------------
Total liabilities and stockholders' equity                                      $    46,905,151    $     26,360,814
                                                                                ===============    ================
</TABLE>

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

                                        4
<PAGE>
<TABLE>
<CAPTION>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                               -------------------


                                               Three months      Three months       Six months         Six months
                                                 ended             ended              ended              ended
                                               March 31,         March 31,          March 31,          March 31,
                                                 1998               1997               1998               1997
                                            ---------------    --------------     --------------    ---------------
Revenues:
<S>                                         <C>                <C>                <C>               <C>
   License fees                             $     3,586,000    $            0     $    4,586,000    $             0
   Synthetic fuel sales                               4,888            20,194              4,888            124,341
   Binder sales                                      84,602             4,017             91,605              4,017
   Coal fines                                     1,903,553                 0          1,903,553                  0
   Operation and maintenance fees                    31,655                 0             66,277                  0
                                            ---------------    --------------     --------------    ---------------
Total revenues                                    5,610,698            24,211          6,652,323            128,358
                                            ---------------    --------------     --------------    ---------------
Operating costs and expenses:
   Cost of coal briquetting operations              730,252           467,612          1,187,199            832,192
   Cost of coal fines                             1,903,553                 0          1,903,553                  0
   Research and development                          72,202            65,396            227,893            170,463
   Selling, general and administrative            1,150,848           422,523          1,891,402          1,229,837
   Compensation related to stock options
     and issuance of common stock                   238,556           276,239            446,047            589,198
   Loss (gain) on sale of facility                  (78,401)            4,196            (78,401)             4,196
   Write-down (write-up) of note
     receivable - related parties collateralized
     by common stock                               (270,000)          431,250           (562,500)          (293,750)
                                            ---------------    --------------     --------------    ---------------
Total operating costs and expenses                3,747,010         1,667,216          5,015,193          2,532,136
                                            ---------------    --------------     --------------    ---------------
         Operating income (loss)                  1,863,688        (1,643,005)         1,637,130         (2,403,778)
                                            ---------------    --------------     --------------    ---------------
Other income (expense):
   Interest income                                  180,677            50,051            302,680            177,857
   Interest expense                              (1,179,925)       (1,568,592)        (2,292,432)        (1,634,468)
   Minority interest in net losses
     of consolidated subsidiaries                    52,211           342,518            137,878            360,670
   Other income                                      15,000             3,064             30,000              4,453
                                            ---------------    --------------     --------------    ---------------
Total other income (expense)                       (932,037)       (1,172,959)        (1,821,874)        (1,091,488)
                                            ---------------    --------------     --------------    ---------------
Net income (loss)                           $       931,651    $   (2,815,964)    $     (184,744)   $    (3,495,266)
                                            ---------------    --------------     --------------    ---------------
Earnings (loss) per share:
   Basic                                    $          0.09    $        (0.36)    $        (0.03)   $         (0.45)
                                            ===============    ==============     ==============    ===============
   Diluted                                  $          0.08    $        (0.36)    $        (0.03)   $         (0.45)

Weighted average shares outstanding:
   Basic                                          9,573,529         7,854,178          9,381,673          7,785,579
   Diluted                                       12,031,250         7,854,178          9,381,673          7,785,579
</TABLE>


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


                                        5

<PAGE>
<TABLE>
<CAPTION>

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



                                                                                    Six Months         Six Months
                                                                                       ended             ended
                                                                                  March 31, 1998    March 31, 1997
                                                                                  --------------    ---------------
Cash flows from operating activities:
<S>                                                                               <C>                <C>
   Net loss                                                                       $     (184,744)    $   (3,495,266)
      Adjustments  to reconcile  net loss to net cash used in operating
       activities:
         Depreciation and amortization                                                   177,698            104,345
         Common stock issued for services                                                      0             40,500
         Write-up of note receivable - related parties                                  (562,500)          (293,750)
         Interest expense based upon issuance of convertible debt and warrants
          at a discount                                                                2,265,543          1,428,571
         Amortization of deferred compensation related to stock options                  446,047            548,698
         Interest written off                                                             15,151                  0
         Interest earned on notes receivable - related parties, collateralized by
          common stock                                                                         0            (79,165)
         Loss (gain) on sale of equipment                                                (78,400)             4,196
         Minority interest in net losses of consolidated subsidiaries                   (137,878)          (360,670)
   Increase (decrease) from changes in assets:
      Receivables                                                                       (384,162)            45,660
      Inventories                                                                        270,908           (200,837)
      Advances on inventory                                                             (902,808)          (750,000)
      Prepaid expenses and other current assets                                         (172,568)           (37,802)
      Deposits and other assets                                                          (46,400)           (91,368)
      Accounts payable                                                                  (403,988)           224,512 
      Due to related party, net                                                         (584,373)                 0
      Accrued liabilities                                                               (188,189)           184,681
      Accrued contractor liability                                                      (420,500)                 0
      Accrued interest                                                                   124,951                  0
      Note payable for inventory                                                         768,500                  0
      Deferred compensation                                                                5,861              5,567
      Deferred revenue from advance license fees                                               0          1,400,000
                                                                                  --------------    ---------------
Net cash (used in) provided by operating activities                                        8,149         (1,322,128)
                                                                                  --------------    ---------------
Cash flows from investing activities:
   Cash paid for property, plant and equipment                                       (21,677,713)        (4,514,852)
   Issuance of notes receivable                                                       (1,257,290)           (49,456)
   Equipment Deposit                                                                    (238,000)                 0
   Advances on binder facility                                                           790,703                  0
   Proceeds from notes receivable                                                              0             24,728
   Proceeds from notes receivable - related party                                        118,596             29,876
                                                                                  --------------    ---------------
Net cash used in investing activities                                                (22,263,704)        (4,509,704)
                                                                                  --------------    ---------------
Cash flows from financing activities:
   Proceeds from issuance of limited partnership interests in subsidiaries                     0            350,000
   Distributions to limited partnership interests in subsidiaries                              0           (292,000)
   Proceeds from notes payable                                                        16,338,073          4,710,721
   Proceeds from notes payable - related party                                                 0            109,470
   Payments on notes payable                                                              (2,622)          (260,713)
   Payments on notes payable - related parties                                          (342,508)                 0
   Proceeds from notes receivable - related parties, collateralized by common stock      301,829            103,000
   Proceeds from issuance of preferred stock, (net)                                       90,005                  0
   Proceeds from issuance of common stock (net)                                          873,396            665,501
   Proceeds from issuance of common stock to be issued (net)                             198,263                  0
   Proceeds from receivable - stock subscriptions                                        577,500                  0
                                                                                  --------------    ---------------
Net cash provided by financing activities                                             18,033,936          5,385,979
                                                                                  --------------    ---------------
Net decrease in cash                                                                  (4,221,619)          (445,853)

Total cash and cash equivalents, beginning of period                                   4,780,301            490,106
                                                                                  --------------    ---------------
Total cash and cash equivalents, end of period                                    $      558,682    $        44,253
                                                                                  ==============    ===============
</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)

                                                                                    Six Months         Six Months
                                                                                       ended             ended
                                                                                  March 31, 1998    March 31, 1997
                                                                                  --------------    ---------------

Supplemental schedule of noncash investing and financing activities:
<S>                                                                               <C>               <C>
    Payable for briquetting facility                                              $    1,153,317    $     1,402,940
    Common stock issued on conversion of notes payable                                 7,000,000            138,396
    Common stock issued for notes receivable - related party collateralized by
     common stock                                                                         45,000                  0
    Notes receivable issued for sale of briquetting facility                           6,500,000          3,500,000
</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.       Management Opinion:

In the opinion of management,  the  accompanying  financial  statements  present
fairly the financial position of Covol Technologies,  Inc. and Subsidiaries (the
"Company")  as of March 31,  1998 and  September  30,  1997,  the results of its
operations  for the three  months and six months  ended March 31, 1998 and March
31,  1997 and its cash flows for the six months  ended  March 31, 1998 and March
31,  1997.  The  results  of  operations  for  the  periods  presented  are  not
necessarily indicative of the results to be expected for the full year.

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

2.       Earnings/Loss Per Share Calculation

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

3.       Inventories and Advances on Inventories

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

4.       Change in Estimate of Fair Value of Note Receivable

During the three and six months ended March 31, 1998, the Company  decreased the
allowance for impairment on the $5,000,000  face value note  receivable from two
stockholders by $270,000 and $562,500,  respectively,  to an adjusted loan value
of $2,152,500. During the three and six months ended March 31, 1997, the Company
increased and decreased the allowance by $(431,250) and $293,750,  respectively.
The changes in the  allowance  were based on changes in the market  value of the
Company's common stock that collateralizes the note receivable. The allowance is
subject to future fluctuations in the Company's common stock.

5.       Notes Receivable

On November 14, 1997, the Company entered into a financial  agreement with CoBon
Energy,  L.L.C.  (CoBon),  relating to the purchase of equipment for a synthetic
fuel production facility.  The original agreement provided that the Company will
purchase,  on CoBon's behalf, up to $1 million worth of equipment for use in the
facility.  Subsequently,  the maximum  amount of the  financing was increased to
approximately  $1,400,000  to provide for  additional  borrowings  by CoBon.  As
consideration  for the loan, the Company will have the right to receive  certain
royalties from the operations of the facility.  If the facility is not completed
for any reason,  the Company will retain title to the purchased  equipment.  The
Company has paid or incurred  costs  totaling  $812,290  for  equipment  and has
loaned CoBon  $445,000,  bringing the total note  receivable to $1,257,290 as of
March 31, 1998.

                                        8
<PAGE>

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


5.       Notes Receivable, continued

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

6.       Advance on Binder Facilities

During the  quarter  ended March 31,  1998,  the  Company  received  advances of
approximately  $490,000  from A.T.  Massay,  PacifiCorp,  and  CoBon for  binder
facilities under construction,  bringing total advances for binder facilities to
$790,703 as March 31, 1998.

7.       Notes Payable and Convertible Debentures

A.J.G. Financial Services, Inc.

During October 1997, the Company entered into an agreement with A.J.G. Financial
Services, Inc. ("AJG") to provide financing of approximately  $4,300,000 for the
building of a wash plant at an  interest  rate of 6%. In  addition,  the Company
granted warrants in an amount equal to 10% of the amount financed. Half of these
warrants  have a strike price of $10 and half have a strike price of $20.  Based
upon  the  market  price  of the  Company's  common  stock  on the  date  of the
agreement,  $398,222 of interest expense was recognized due to the $10 warrants.
As  of  March  31,  1998,  the  Company  had  borrowed   $4,325,433  under  this
arrangement.  The Company began start-up testing of the wash plant during April,
1998.

During the quarter ended March 31, 1998, the Company  entered into an additional
agreement  with AJG to borrow up to $6.5  million at an interest  rate of 6% per
annum to be used for  construction  of a  briquetting  facility  located in West
Virginia.  As of March 31, 1998 the Company had borrowed  $4,698,880  under this
agreement. The loan is due in full February, 2001.

PacifiCorp Financial Services, Inc.

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

Effective  March 3, 1998, PFS exercised  their option to convert all outstanding
borrowings under this arrangement. The conversion of the borrowings in excess of
$6,000,000  resulted in an interest charge of $714,285 during the quarter ending
March 31, 1998 because the conversion  price is below the market price. PFS also
asserted  that the Company  sold common stock during 1997 at a price that caused
the  antidilution  provisions of its  conversion  agreement with Covol to become
applicable.  This  resulted in the  issuance of  additional  common stock with a
value of  approximately  $220,000.  This amount was charged to interest  expense
during the quarter ended March 31, 1998.

                                        9
<PAGE>

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


7.       Notes Payable and Convertible Debentures, continued

DTE Energy Services, Inc.

In October 1997, the Company entered into a financial  agreement with DTE Energy
Services,  Inc.  ("DTE")  relating to the  purchase of  equipment  for up to two
synthetic fuel production facilities. The agreement allows the Company to borrow
up to $2,000,000  with interest at LIBOR plus 1.0% (LIBOR was 6.69% on March 31,
1998).  The Company has drawn  $1,999,719  under the  agreement  as of March 31,
1998. These borrowings were repaid during May 1998.

Trans Pacific Stores

On March 17, 1998, the Company  entered into a loan agreement with Trans Pacific
Stores,  Ltd.  ("TPS")  wherein TPS agreed to loan the Company up to $4,000,000.
The loan is  collateralized by future earned license fees payable to the Company
from the synthetic  fuel  manufacturing  facilities  constructed  by Pace Carbon
Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at twelve
percent (12%) per annum. The interest rate is adjusted to thirteen percent (13%)
on September 20, 1998 and to fourteen  percent (14%) on December 20, 1998.  Each
time the interest rate is adjusted, a one percent (1%) renewal fee of $40,000 is
due and payable.  Interest on the unused  portion of the  borrowing  will accrue
interest  at one  percent  (1%) per annum  until  the loan is paid in full.  The
outstanding  principal  and interest is due in full before March 20, 1999. As of
March 31, 1998,  $530,300 had been borrowed under this arrangement.  A member of
the Company's Board of Directors is affiliated with TPS.

Fun Enterprises

On January 29, 1998, the Company entered into a loan and security agreement with
Fun  Enterprises,  Pty Ltd.  ("Fun"),  a current holder of the Company's Class B
preferred  stock,  relating to the  development  and  construction  of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern  coal  company.  The  agreement  allows  the  Company  to  borrow  up to
$5,800,000.  The interest rate will be 12% per annum until August 31, 1998,  and
15% per annum  thereafter  until  paid in full.  Fun will also have the right to
receive  certain  royalties after the facility is sold. As of March 31, 1998 the
Company has drawn $3,100,000 on the loan. The loan is due in full at the earlier
of the sale of the facility or August 31, 1999.


                                       10
<PAGE>
<TABLE>
<CAPTION>

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


7.       Notes Payable and Convertible Debentures, continued


The following is a table  summarizing  notes payable and convertible  debentures
previously discussed.
                                                                             March 31, 1998        September 30, 1997
                                                                           -------------------   -----------------------
<S>                                                                       <C>                     <C>
Note payable to a corporation, bearing interest at 6% 
collateralized by plant and equipment.                                     $         4,325,433     $           1,057,849

Note payable to a corporation, bearing interest at 6%.  50% of accrued
interest due February 26, 1999 and balance of accrued interest and principal
due February 26, 2001                                                                4,698,880                         -

Note payable to a corporation bearing interest at prime (8.5% at March
31, 1998) plus 2%.  Collateralized by plant and equipment.  Principal
and interest due December 20, 1999                                                   2,813,294                 2,787,255

Convertible  note payable to a corporation,  bearing interest at prime (8.50% at
March 31, 1998) plus 2%. Collateralized by plant, equipment and coal fines. Loan
of $6,686,473 plus accrued interest of $313,527 converted to common stock 
March 20, 1997.                                                                              -                 3,302,422

Note payable to a corporation bearing interest at LIBOR plus 1.0%
(LIBOR was 6.69% on March  31, 1998). Amounts are due at the
earlier of the closing of alternative financing or December 31, 1998.                1,999,719                         -

Note payable to a corporation.  Interest on the  outstanding  principal  balance
accrues at twelve  percent  (12%) per annum.  The  interest  rate is adjusted to
thirteen  percent (13%) on September  20, 1998 and to fourteen  percent (14%) on
December 20, 1998.  Each time the interest rate is adjusted,  a one percent (1%)
renewal fee of $40,000 is due and payable. Interest on the unused portion of the
borrowing  will accrue  interest at one percent (1%) per annum until the loan is
paid in full. The balance and interest is due in full before March 20, 1999.  The
loan is secured by future earned license fees.                                         530,300                         -

Note payable to a corporation bearing interest at 12% per annum until August 31,
1998, and 15% per annum thereafter until paid. The loan
is due in full at the earlier of the sale of the facility or August 31, 1999         3,100,000                         -

Note payable to an individual bearing interest at 9% with monthly
payments.                                                                               97,378                         -

Convertible debenture to two individuals and one trust, bearing interest
at prime (8.5% at March 31, 1998) plus 2%.  Principal and interest due
June 30, 1998.  Convertible at $11.00 per share.                                     1,000,000                 1,000,000
                                                                           -------------------   -----------------------
                                                                                   $18,565,004                $8,147,526
   Less: current portion                                                            (3,536,679)               (5,247,526)
                                                                           -------------------   -----------------------
   Total non-current                                                               $15,028,325                $2,900,000
                                                                           ===================   =======================
</TABLE>

                                       11
<PAGE>

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



8.      Stockholders' Equity

The table below  presents the activity in  stockholders'  equity from January 1,
1998 through March 31, 1998.

<TABLE>
<CAPTION>
                                                                                                                Notes and
                                                                                                                 interest
                                                                                                                receivable
                                                                                                                -related
                                                                                                                parties
                                                                                                                  from
                                                                                                                issuance
                                                                                                                 of, or    Deferred
                       Preferred Stock            Common Stock          Common Stock to be  issued               collater-   compen-
                                 Capital in                Capital in                Capital in               alized       sation
                                 excess of                  excess of                excess of  Accumulated  by, common  on stock
                 Shares  Amount  par value  Shares  Amount  par value Shares Amount  par value   Deficit        stock      options
                 ------  ------  ---------  ------  ------  --------- ------ ------  ---------   -------     -----------   -------
<S>           <C>       <C>   <C>        <C>       <C>     <C>        <C>    <C>      <C>    <C>         <C>            <C>
Balance at
January 1,
1998           315,882  $316  $5,184,626 9,210,575 $9,211  $47,058,967      0   $0        $0 ($33,307,951) ($7,701,088) ($4,475,756)

Common stock
issued for
cash from
exercise of
stock options                               12,100     12       31,822

Common stock
to be issued
for cash from
exercise of
stock options                                                          36,060   36   198,290

Conversion of
notes payable                            1,000,000  1,000    6,999,000 27,000   27   219,348

Common stock
issued for
note receivable
- related
party, collater-
alized by
common stock                                30,000     30       44,970                                         (45,000)

Cash received in
payment on
notes receivable
- related
parties from
issuance of
common stock                                                                                                   298,829

Compensation
expense
related to
issuance and
conversion of
stock options                                3,500      3       36,310

Amortization of
deferred
compensation on
stock options                                                                                                               207,493

Interest  earned 
on  notes 
receivable  
related  parties  
from  issuance 
of or collater- 
alized by common
stock                                                                                                           15,461

Interest expense
based upon
issuance of
convertible debt
and warrants
at a discount                                                  933,660

Write-up of note
receivable -
related parties                                                                                               (270,000)

Net income for
the quarter
ended March
31, 1998                                                                                          931,651
                -------  ----  ---------- ---------- ------- ----------- ------ --- -------- ------------  ----------  ----------
Balance at
March 31, 1998  315,882  $316  $5,184,626 10,256,175 $10,256 $55,104,729 63,060 $63 $417,638 ($32,376,300)($7,701,798)($4,268,263)
                =======  ====  ========== ========== ======= =========== ====== === ========  ===========  ==========  ==========

</TABLE>
                                       12

<PAGE>
<TABLE>
<CAPTION>


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


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

For the Three Months Ended March  31, 1998


                                                                         Three months                     Six months
Basic earnings (loss) per share calculation                                 ended                            ended
                                                                        March 31, 1998                   March 31, 1998
---------------------------------------------------------------- -----------------------------    ---------------------------
                                                                    Basic           Diluted          Basic           Diluted 
                                                                 ------------    -------------    ------------    ------------ 
<S>                                                              <C>          <C>             <C>         <C>
Net income (loss)                                                $    931,651    $     931,651    $   (184,744)   $   (184,744)
                                                                                 =============                    ============
  Preferred stock dividends accrued                                   (84,413)                         (84,413)
                                                                 ------------                     ------------
Net income (loss) basic EPS                                      $    847,238                     $   (269,157)
                                                                 ============                     ============

Number of common shares outstanding                                10,256,175       10,256,175      10,256,175      10,256,175

Effect of using weighted average common 
 shares outstanding                                                  (682,646)        (682,646)       (874,502)       (874,502)
                                                                 ------------    -------------    ------------    ------------
Weighted average number of common shares                            9,573,529        9,573,529       9,381,673       9,381,673

Dilutive effect:
 Common stock options                                                                1,215,985                              -
 Common stock warrants                                                                 500,283                              -
 Convertible preferred stock                                                           741,453                              -
                                                                                 -------------                    ------------
Dilutive weighted average number of common 
 shares outstanding                                                                 12,122,154                       9,381,673
                                                                                 =============                    ============
</TABLE>

Options to purchase 1,663,500 shares of common stock at prices between $1.50 and
$11.50 per share were  outstanding  during the second quarter of fiscal 1998 and
were included in the computation of diluted EPS. For the quarter ended March 31,
1997,  these  options  were not  included in the  computation  of loss per share
because any effect would have been antidilutive.

Warrants to purchase  1,441,523  shares of common stock at prices  between $7.00
and $10.00 per share were outstanding  during the second  quarter of fiscal 1998
and were  included in the  computation  of diluted EPS.  Additional  warrants to
purchase  638,750 shares of common stock at prices between $15.00 and $30.00 per
share were  outstanding  during the second  quarter of fiscal  1998 and were not
included in the  computation of earnings per share because any effect would have
been  antidilutive.  For the quarter  ended March 31,  1997,  warrants  were not
included in the computation of loss per share because any effect would have been
antidilutive.

Convertible  debt of $1,000,000  was  outstanding  during the second  quarter of
fiscal 1998. The debt is convertible  into 90,909 shares of common stock and was
not included in the computation of diluted earnings per share because the effect
would have been antidiluted.  For the quarter ended March 31, 1997,  convertible
debt was not included in the  computation  of loss per share  because any effect
would have been antidilutive.

                                       13
<PAGE>

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


Preferred stock  convertible into 741,453 shares of common stock at of $7.00 was
outstanding  during the second  quarter of fiscal  1998 and was  included in the
computation of diluted EPS.

10.     Contingencies

During 1996, the Company or its licensees  entered into thirty contracts for the
construction   of   manufacturing   facilities  that  would  use  the  Company's
proprietary  Briquetting  Technology  in  the  conversion  of  coal  fines  into
synthetic fuel. All of these  construction  contracts  contain  penalties if the
contracting party fails to proceed with the construction of these facilities.

Fifteen of these  construction  contracts were entered into by independent third
parties and Covol  Technologies was not a party.  Accordingly,  no liability for
failing to proceed exists with these contracts. Four contracts were entered into
jointly by Covol and its joint venture partners.  The remaining eleven are Covol
contracts.  Of the contracts  for which Covol has liability or shared  liability
there are two joint venture  facilities  that will not be constructed  and there
are three contracts where the facilities may not be constructed. As of September
30, 1997,  the Company  accrued a liability of  $1,477,000  for these  potential
penalties.  During the first six months ended March 31,  1998,  the Company paid
penalties  in the amount of $102,500 and  reversed  $318,000 for a  construction
contract  where notice to proceed was  subsequently  given.  Accordingly,  as of
March 31, 1998, the remaining accrued contractor liability is $1,056,500.

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

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

11.      Subsequent Event

During May 1998, the Company obtained financing from two substantial entities to
be used for the completion of construction  and working capital  requirements of
the  Mountaineer  synthetic  fuel  facility.  There is $8,500,000 of total funds
available under this arrangement including $500,000 for an advance licensing fee
for the Company's coal briquetting technology. As of May 7, 1998, $6,250,000 had
been  received  or was  available.  These funds have been used to payoff the DTE
loan totaling  $1,999,719,  pay advance licensing fees, cover construction costs
on the Mountaineer facility incurred to date and to fund necessary  construction
costs  through  June 30,  1998 to be  incurred in  completion  of the  facility.
Additional  funds will be made available as needed.  The lenders have the option
to apply funds advanced towards the purchase of the facility.

On April 21,  1998 the Company  entered  into loan  agreements  with each Carbon
Resources and C.C. Pace Capital, L.L.C. (the "Borrowers"), to lend, in quarterly
installments,  up to an  aggregate  principal  amount not to exceed  $14,250,000
during the period from and including  November 1, 1998 to and including February
1, 2008. The Company has agreed to make the initial  advance on November 1, 1998
in the amount of  $375,000,  or such other  amounts as provided  for in the loan

                                       14
<PAGE>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


agreement,  and  thereafter on the first day of each February,  May,  August and
November during the loan period. Interest accrues on the principle amount of the
loan  outstanding at a simple annual rate of six percent (6%).  Repayment of the
loan shall be paid from  amounts,  if any,  distributed  to the Borrowers by the
General  Partner  of  Pace  Carbon  Synfuels,  L.P.,  which  owns  100%  of  the
memberships in the Project Companies discussed below.

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

                                       15
<PAGE>

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


Results of Operations

Three months  ended March 31, 1998  compared to the three months ended March 31,
1997

         Revenues.  For  the  quarter  ended  March  31,  1998,  total  revenues
increased by $5,586,487  to $5,610,698  from $24,211 for the quarter ended March
31, 1997.  There were $3,586,000 in advance  license fees recognized  during the
quarter  ended March 31, 1998 while no license fees were  recognized  during the
quarter  ended  March 31,  1997.  Advance  license  fees are  normally  due when
construction  of  the  related  briquetting  facility  begins  or  when  certain
construction  milestones or other  conditions are met.  Advance license fees for
the quarter ended March 31, 1998 related to five briquetting facility contracts.
The Utah  Plant was placed in service in early  1997.  However,  production  and
sales of synthetic fuel were  significantly  curtailed due to the high levels of
ash content in feedstock  used for  production at the Utah Plant.  To remedy the
problem of ash content,  the Company has  constructed  a wash plant for the Utah
Plant  that  is  currently  going  through  start-up  procedures.   Accordingly,
synthetic fuel sales of $4,888 during the quarter ended March 31, 1998 were less
than the sales of $20,194  during the quarter ended March 31, 1997.  The Company
believes that as the wash plant becomes  operational,  it will be able to supply
sufficient  quality  coal  fines to the Utah Plant to allow the plant to operate
profitably at or near  capacity.  The Company has had various  discussions  with
potential end-users of the synthetic fuel product.  However,  there is currently
no contract or obligation  in place for the sale of the synthetic  fuel produced
at the Utah Plant. The Company received revenues from binder sales in the amount
of $84,602 for the  quarter  ended March 31, 1998 as compared to sales of $4,017
that were made in the quarter ended March 31, 1997.  The Company  expects binder
sales to increase  proportionate  to future  synthetic fuel production and sales
increases.  The  Company  received  revenues  from the sale of coal fines in the
amount of $1,903,553  for the quarter ended March 31, 1998 under an agreement to
sell the coal fines at their cost.  The Company had revenues from  operation and
maintenance  fees of $31,655  for the  quarter  ended March 31, 1998 and no such
fees for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$2,079,794  to $3,747,010  for the quarter ended March 31, 1998 from  $1,667,216
for the quarter ended March 31, 1997. Operating costs and expenses  attributable
to the  briquetting  operations  increased  $262,640 to $730,252 for the quarter
ended March 31, 1998 from  $467,612 for the quarter  ended March 31,  1997.  The
costs for briquetting  operations for the quarter ended March 31, 1998 were more
than for the quarter ended March 31, 1997 costs due to material, labor and other
costs for the increased refinement and implementation of the briquetting process
as the Company moves into commercial  production  levels at the Utah and Alabama
facilities.  When Utah Synfuel #1, a Delaware limited partnership ("US #1"), and
the Company sold the Utah facility to Coaltech,  US #1 entered into an agreement
to purchase synthetic fuel produced at the Utah Plant for costs incurred plus $1
per ton. The Utah Plant incurred significant costs for coal fines, labor, binder
materials,  repairs  and  maintenance,  equipment  rental and other  costs as it
worked through various production  issues.  These costs are included in the cost
of  coal  briquetting  operations.  As  the  wash  plant  moves  towards  normal
operational  levels and  efficiencies,  the Company  anticipates  that the costs
incurred per ton of synthetic  fuel produced will be more in line with the sales
value of the synthetic  fuel and will reduce the net operating loss that results
from these operations.  See "ITEM 1.  BUSINESS--Business of Company--Utah Plant"
of the Company's Form 10-K.  During the quarter ended March 31, 1998 the Company
incurred  $1,903,553 in cost of coal fines sold under the arrangement  discussed
in the previous paragraph.

         Research  and  development  costs  increased  $6,806 or 10%  during the
quarter  ended March 31, 1998 from $65,396 for the quarter ended March 31, 1997.
The Company  expects  continued  research and  development  costs in its ongoing
efforts to refine further the Company's synthetic fuels and other technology.

         Selling,  general and administrative expense increased $728,325 or 172%
to $1,150,848 for the quarter ended March 31, 1998 from $422,523 for the quarter
ended March 31, 1997.  The increase  related to necessary  personnel  increases,
increased  outside  professional  services  relative to  facility  construction,
increased travel and transportation expenses incurred to monitor construction at

                                       16
<PAGE>

the numerous facility locations, increased expenses incurred to pursue financing
alternatives  necessary to meet the Company's  needs and general  infrastructure
cost increases as the Company continues to grow and expand.

         For the quarter ended March 31, 1998, increased expenses were partially
offset by a decrease in  compensation  expense  resulting  from the  issuance of
stock and stock  options as compared to the quarter  ended March 31,  1997.  The
decrease of $37,683 is attributable to a reduction in the use of stock and stock
options in compensating  employees and consultants of the Company. The reduction
is also reflective of a general change in the Company  philosophy  regarding the
strike price for options granted.  Generally, stock options that will be granted
by the Company in the future are not expected to be  "in-the-money"  at the date
of grant.

         During the quarter ended March 31, 1998, the Company recorded a gain of
$78,401 on the sale of the Alabama facility as compared to a loss of $4,196 from
facility sales during the quarter ended March 31, 1997.

         In fiscal 1996,  the Company was  required,  under  generally  accepted
accounting principles,  to adjust the $5 Million 6% promissory note (the "Note")
from  the  sale  of  Industrial   Management  and   Engineering,   Inc.,   State
Incorporated,   Central  Industrial  Construction,  Inc.  and  Larson  Limestone
Company,  Inc. (the "Construction  Companies") to the ascertainable value of the
Company's  common stock  collateralizing  the Note.  This  accounting  treatment
resulted in a write-down  of the note  receivable  by $2,699,575 in fiscal 1996.
For the quarter ended March 31, 1998, this adjustment  resulted in a write-up of
the Note by $270,000  compared to a write-down of $431,250 for the quarter ended
March  31,  1997.  The Note is  guaranteed  by the  Buyers  of the  Construction
Companies  and there has been no event of default or past due  payment  occur on
the Note. The Company has no reason to believe that the payments under the terms
of the Note will not be made.

         Total Other Income and Expenses.  For the quarter ended March 31, 1998,
the Company had other income totaling  $247,888 and other expenses of $1,179,925
for net other  expenses of $932,037.  For the quarter ended March 31, 1997,  the
Company had other income totaling  $395,633 and other expenses of $1,568,592 for
net  other  expenses  of  $1,172,959.   This  decrease  of  $240,922   consisted
principally  of a decrease in interest  expense of $388,667  resulting  from the
issuance of less convertible debt where the conversion price was "in-the-money".
The minority interest in the operations of the consolidated subsidiaries changed
by $290,307 as a result of the subsidiaries  incurring smaller losses during the
quarter ended March 31, 1998 compared to the comparable period in 1997.

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

         Net Income.  For the quarter ended March 31, 1998,  the Company had net
income of  $931,651 as compared  with a net loss of  $2,815,964  for the quarter
ended March 31, 1997  resulting in a net increase of  $3,747,615  in net income.
This increase resulted primarily from a significant  increase in total revenues,
and a  significant  decrease  in  interest  expense  offset  by an  increase  in
operating costs and expenses, all as previously discussed.

         Amended Form 10-Q.  All financial information for the quarter ended and
six months  ended  March 31,  1997 and  comparison  between  that period and the
corresponding  period in 1998 are based upon the restarted financial  statements
filed in the Company's  Form 10-Q/A,  Amendment No. 1 for the period ended March
31, 1997.

                                       17
<PAGE>

Results of Operations

Six months ended March 31, 1998 compared to the six months ended March 31, 1997

         Revenues.  For the six months  ended  March 31,  1998,  total  revenues
increased by  $6,523,965  to  $6,652,323  from $128,358 for the six months ended
March 31, 1997.  There were  $4,586,000 in advance  license fees received during
the six months ended March 31, 1998 while no license fees were  received  during
the comparable  period during 1997.  Advance  license fees are normally due when
construction  of  the  related  briquetting  facility  begins  or  when  certain
construction  milestones or other  conditions are met. The Utah Plant was placed
in service in early 1997.  However,  production and sales of synthetic fuel were
significantly  curtailed due to the high levels of ash content in feedstock used
for  production  at the Utah Plant.  To remedy the problem of ash  content,  the
Company has  constructed a wash plant for the Utah Plant that is currently going
through start-up procedures.  Accordingly, synthetic fuel sales of $4,888 during
the six months ended March 31, 1998 were less than the sales of $124,341  during
the corresponding period ended March 31, 1997. The Company believes that, as the
wash plant becomes  operational,  it will be able to supply  sufficient  quality
coal fines to the Utah Plant to allow the plant to operate profitably at or near
capacity.  The Company has had various  discussions with potential  end-users of
the  synthetic  fuel  product.  However,  there  is  currently  no  contract  or
obligation  in place for the sale of the  synthetic  fuel  produced  at the Utah
Plant. The Company received  revenues from binder sales in the amount of $91,605
for the six months ended March 31, 1998 as compared to sales of $4,017 that were
made during the six months  ended March 31,  1997.  The Company  expects  binder
sales to increase  proportionate  to future  synthetic fuel production and sales
increases.  The  Company  received  revenues  from the sale of coal fines in the
amount of $1,903,553  for the six months ended March 31, 1998 under an agreement
to sell the coal fines at their cost. The Company had operation and  maintenance
fees of  $66,277  for the six  months  ended  March  31,  1998 and no such  fees
revenues for the corresponding period in 1997.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$2,483,057 to $5,015,193 for the six months ended March 31, 1998 from $2,532,136
for  the  six  months  ended  March  31,  1997.  Operating  costs  and  expenses
attributable to the briquetting  operations increased $355,007 to $1,187,199 for
the six months ended March 31, 1998 from $832,192 for the six months ended March
31, 1997.  The costs for  briquetting  operations for the six months ended March
31, 1998  increased  when compared to the six months ended March 31, 1997 due to
material,  labor and other costs for the increased refinement and implementation
of the  briquetting  process as the  Company  moves into  commercial  production
levels at the Utah and Alabama facilities. During the six months ended March 31,
1998 the  Company  incurred  $1,903,553  in costs for coal  fines sold under the
arrangement previously discussed.

         Research and development  costs increased $57,430 or 34% during the six
months  ended March 31, 1998 from  $170,463  for the six months  ended March 31,
1997.  The Company  expects  continued  research  and  development  costs in its
ongoing  efforts  to  refine  further  the  Company's  synthetic  fuels or other
technologies.

         Selling,  general and administrative  expense increased $661,565 or 54%
to $1,891,402  for the six months ended March 31, 1998 from  $1,229,837  for the
six months ended March 31, 1997.  The  increase  related to necessary  personnel
increases,   increased  outside  professional   services  relative  to  facility
construction,  increased travel and transportation  expenses incurred to monitor
construction at the numerous facility locations,  increased expenses incurred to
pursue financing  alternatives necessary to meet the Company's needs and general
infrastructure cost increases as the Company continues to grow and expand.

         For the six months ended March 31, 1998, compensation expense resulting
from the issuance of stock and stock  options  decreased by $143,151 as compared
to the six  months  ended  March 31,  1997.  The  decrease  is  attributable  to
reduction in the use of stock and stock  options in  compensating  employees and
consultants of the Company. The reduction is also reflective of a general change
in the  Company  philosophy  regarding  the strike  price for  options  granted.
Generally,  stock  options that will be granted by the Company in the future are
not expected to be "in-the-money" at the date of grant.

         During the six months  ended March 31, 1998 the  Company  recognized  a
gain of $78,401 on the sale of the  Alabama  facility  as  compared to a loss of
$4,196 from facility sales during the six months ended March 31, 1997.

                                       18
<PAGE>

         For the six months ended March 31, 1998, the adjustment relative to the
note received from the sale of the Construction Companies resulted in a write-up
of the Note by $562,500  compared  to a write-up of $293,750  for the six months
ended March 31, 1997.  The Note is guaranteed by the Buyers of the  Construction
Companies  and there has been no event of  default  or past due  payment  on the
Note.  The Company has no reason to believe that the payments under the terms of
the Note will not be made.

         Total Other  Income and  Expenses.  For the six months  ended March 31,
1997,  the Company had other  income  totaling  $542,980  and other  expenses of
$1,634,468 for net other expenses of $1,091,488.  For the six months ended March
31, 1998, the Company had other income  totaling  $470,558 and other expenses of
$2,292,432 for net other  expenses of  $1,821,874.  This increase in expenses of
$730,386  consisted  principally of an increase in interest  expense of $657,964
resulting from the issuance of convertible  debt where the conversion  price was
"in-the-money".  The minority  interest in the  operations  of the  consolidated
subsidiaries  changed by $222,792 as a result of the subsidiaries having smaller
losses  during the six months  ended March 31, 1998  compared to the  comparable
period in 1997.

         Net Income.  For the six months ended March 31, 1998, the Company had a
net loss of  $184,744  as  compared  with a net loss of  $3,495,266  for the six
months  ended  March  31,  1997  resulting  in a net  decrease  in the  loss  of
$3,310,522.  This decrease  resulted  primarily  from a significant  increase in
total  revenues  and was  offset by smaller  increases  in  operating  costs and
expenses, and an increase in other expenses of $730,386.

Liquidity and Capital Resources

         For the six  months  ended  March 31,  1998,  management  believes  the
Company made significant progress in its movement from continued development and
refinement of the Company's proprietary technology to commercial operations. The
decrease in cash used by the Company in operating  activities from  $(1,322,128)
for the six months ended March 31, 1997 to  $(229,851)  for the six months ended
March 31, 1998 was largely due to the decrease in the net loss of $3,495,266 for
the six months  ended  March 31, 1997  compared  to $184,744  for the six months
ended March 31, 1998. This decrease was offset by $1,400,000 of advanced license
fees that were  received  during the six months  ended  March 31, 1997 that were
deferred.

         The Company made cash  payments for  property,  plant and  equipment of
$21,677,713  during the six months ended March 31, 1998. These additions related
to the wash plant at the Utah  facility,  three  synthetic  fuel  facilities,  a
second line at the Utah  facilities,  binder plants and  briquetting  equipment.
Except for the wash plant,  the Company  plans on selling  these assets to third
parties.  This  investment was funded by cash available at September 30, 1997 of
$4.8 million and proceeds from the issuance of notes  payable of $16.3  million.
The Company  believes  it will be able to meet  future  cash flow needs  through
additional  issuances of notes payable,  issuances of equity securities and from
cash generated by operations.

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

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

                                       19
<PAGE>

         In  October  1997,  the  Company  entered  into an  agreement  with AJG
Financial  Services,  Inc. ("AJG"),  whereby AJG agreed to provide financing for
the wash plant being  constructed by the Company to provide washed coal fines to
the Utah Plant.  The  financing  consists of a note  bearing  interest at 6% per
annum with  principal  and  interest due and payable two years from the time the
debt is incurred.  As additional  consideration  to AJG for the  financing,  the
Company agreed to grant  warrants to purchase  Company common stock in an amount
equal to 10% of the dollar  amount  financed,  with fifty  percent of the shares
having a purchase  price of $10 per share and fifty percent of the shares having
a purchase price of $20 per share. The warrants are immediately  exercisable and
expire in two years.

         As of March 31,  1998,  the  Company had a working  capital  deficit of
$5,057,626, compared to a working capital deficit of $3,195,420 at September 30,
1997.  This  increase  resulted   primarily  from   construciton   financing  of
briquetting facilities with short-term financing. At March 31, 1998, the Company
owned three facilities that were in various stages of construction.  The Company
expects to sell the majority of these  facilities  and recoup its investment and
retire the related  borrowings.  The Company  believes that additional  advanced
license fees to be received,  and, if  necessary,  available  financing  will be
sufficient  to  fund  the  operations  of the  Company  until  cash  flows  from
operations are sufficient to fund the Company's operations. However, there is no
assurance  that the Company  will be able to obtain the  necessary  financing or
receive sufficient cash flows from operations during fiscal year 1998.

         The Company  anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting Technology; (ii) the sale of chemical
binder to plants utilizing the Briquetting Technology;  (iii) operating fees for
the  operation of  facilities  owned by third  parties;  (iv)  payments on notes
receivable  and (v) proceeds of equity and debt  offerings will be available and
used to fund working capital and other operating needs through fiscal 1998.

         In the third and fourth  quarters of the fiscal  year ending  September
30, 1998, the Company anticipates payments of advance license fees for each site
utilizing the  Company's  Briquetting  Technology,  except for the Savage Mojave
project.  The  timing  for and  amount  of such fees  varies  and is tied to the
commencement of construction,  the completion of construction, the receipt of an
IRS Private Letter Ruling ("PLR") for a particular  project,  receipt of project
financing  or the sale of a facility.  Since these  conditions  should be met no
later than  September 30, 1998,  all such advance  license fees, if any, will be
earned by the end of the fiscal year ending September 30, 1998.

         The Company  anticipates  license fees from the  production and sale of
synthetic fuel from the Utah Plant,  Alabama Plant and Savage Mojave project, if
any,  after  the  second  quarter  of  fiscal  year  1998.  The  balance  of the
briquetting  facilities licensing the Briquetting  Technology are expected to be
placed into service during the third quarter of 1998.  Accordingly,  the Company
expects that there will be earned license fees payable from production and sales
from  these  plants  beginning  during the third  quarter  of 1998,  but are not
expected to be significant until late 1998 or early 1999.

         Advance license fees and ongoing license fees  attributable to the Utah
Plant and the Alabama  Plant are payable to US #1 and AS #1,  respectively.  The
Company  would  receive  its  share of such  license  fees,  net of  partnership
expenses,  in the form of cash  distributions  in  proportion  to the  Company's
interests in the partnerships, 63% for US #1 and 74% for AS #1.

         The  Company  has  contracted  with its  licensees  to  provide  binder
materials on a cost plus basis.  The Company  expects to have increased sales of
binder materials to the Utah Plant and the Alabama Plant in the third quarter of
fiscal year 1998. As  previously  mentioned,  the balance of the synthetic  fuel
facilities that will be utilizing the Briquetting  Technology are expected to be
placed in service late in the third quarter of the fiscal year ending  September
30, 1998.  The Company  expects to earn the gross profit from the sale of binder
to these other  plants when they  commence  production  and in amounts  that are
proportionate to their production.

         Under  current  contracts,  the only facility for which the Company has
operational responsibility is the Utah Plant. The Company will earn a prescribed
amount per ton for  product at this  facility.  The Company  expects  that there
could be other plants for which the Company will have operational responsibility

                                       20
<PAGE>

and for which it will earn an operation  and  maintenance  fee. The Company does
not expect  that  operation  and  maintenance  fees will  constitute  a material
portion of its revenues in the future.

         The Company intends to seek additional  project specific  financing for
the  completion of  construction  for certain  synthetic fuel  facilities.  That
financing is expected to be in the form of traditional debt financing, debt with
an interest in the cash flow  attributable  to the facility being  financed,  or
financing by a potential  purchaser of the facility.  Facilities  being built by
licensees  of the  Company's  technology  will  generally  be  financed  by such
licensees.  There is no assurance that the Company or its licensees will be able
to obtain the necessary  financing to complete the construction of the synthetic
fuel facilities currently in process.

         Existing Debt Arrangements

         In  November  1996,  the  Company   issued   convertible   subordinated
debentures  in the principal  amounts of $300,000,  $200,000 and $500,000 to Mr.
Douglas M. Kinney,  Mr.  Gordon L. Deane and the Douglas M. Kinney 1999 Retained
Annuity Trust,  respectively.  The convertible  subordinated  debentures  accrue
interest at prime plus two percent (2%) with interest and  principal  payable in
full on June 30,  1998.  All or a portion  of the  unpaid  principal  due on the
debenture is convertible  into Company common stock at $11 per share.  Through a
separate subscription agreement, the Company has granted piggy-back registration
rights to the investors for Company  common stock issued upon  conversion of the
convertible  subordinated  debentures.  The  Company has the right to prepay the
principal of the convertible subordinated debentures.

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

         The Company is  constructing  a wash plant to provide washed coal fines
to the Utah  Plant for the  manufacture  of  synthetic  fuel.  A portion  of the
construction  is being  financed  through AJG. The total  estimated cost for the
wash plant is approximately $7.7 Million.  As of March 31, 1998, the Company had
borrowed  $4,325,433  under its arrangement with AJG. The financing is evidenced
by a promissory note executed and delivered by the Company to AJG and is secured
by the wash  plant.  The note  currently  bears  interest  at 6% per annum  with
principal  and  interest  due and  payable  two years from the time the debt was
incurred.  As additional  consideration  to AJG for the  financing,  the Company
agreed to grant warrants to purchase  Company common stock in an amount equal to
10% of the dollar  amount  financed,  with fifty  percent of the shares having a
purchase  price of $10 per  share  and  fifty  percent  of the  shares  having a
purchase price of $20 per share.  The warrants are  immediately  exercisable and
expire in two years.

         On March 20,  1997,  the Company  entered into a  Convertible  Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp  amended the Loan  Agreement.  Under the amended Loan
Agreement  terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down promissory note (the "Promissory Note") payable to PacifiCorp.  As of March
3, 1998 the Company had drawn  $6,686,473  under the Loan Agreement and interest
of $313,527 had accrued.  Principal and accrued  interest on the Promissory Note
are due and payable on August 31, 1998 (the "Due Date"),  unless the  Promissory
Note is converted into Company common stock. Interest due on the Promissory Note
is calculated based on a 360 day year and the actual number of days lapsed,  and
will be compounded  monthly.  The interest rate is a rate per annum equal to the
lesser of (i) the  highest  rate  allowed by law, or (ii) the sum of the rate of
interest publicly  announced by Morgan Guaranty Trust Company of New York in New
York City from time to time plus two percent (2%) per annum. The proceeds of the
loan (the "Loan") may be used by the Company to: (i) complete construction of

                                       21
<PAGE>

the  Alabama  Plant;  (ii)  finance  the  purchase of coal fines for the Alabama
Plant;  (iii) fund the net  working  capital  needs of the Alabama  Plant;  (iv)
finance the development and construction of a wash plant for coal fines; and (v)
other uses  related to the  Alabama  Plant  approved by  PacifiCorp  in its sole
discretion.  The Company's obligation to repay the Loan is secured by a security
interest and lien on certain  property  relating to the Alabama Plant. On May 5,
1997,  PacifiCorp  filed  a  Schedule  13D  with  the  Securities  and  Exchange
Commission  reporting its  beneficial  ownership as being in excess of 5% of the
shares of Company common stock should PacifiCorp  convert the full amount of the
Loan.  On March 3, 1998,  PacifiCorp  exercised  its option to convert  the full
amount of $7,000,000  owing under the loan into 1,000,000 shares of common stock
plus an additional  27,000 shares  pursuant to  anti-dilution  provisions of the
loan agreement. Pursuant to the Registration Rights Agreement, dated as of March
20,  1997,  between the  Company and  PacifiCorp,  PacifiCorp  has been  granted
certain  demand and  piggy-back  registration  rights with  respect to shares of
Company  common  stock that were  acquired  by  PacifiCorp  pursuant to the Loan
Agreement.

         During the quarter  ended March 31, 1998,  the Company  entered into an
interim  construction  financing  agreement  with DTE Energy  Services,  Inc. to
finance up to $2 Million for the Company's  purchase of equipment and payment of
other project development costs relating to certain facilities.  As of May 1998,
approximately  $1,999,720 has been advanced under this financing agreement.  The
Company's  obligation  to repay the amounts  borrowed is  collateralized  by the
assets  purchased  with the proceeds of the financing.  Interest  accrues on the
amount  advanced  at a per annum rate  equal to the LIBOR rate plus 1%  adjusted
monthly.  The principal amount of the financing is payable upon the closing of a
take-out  construction  loan or December 31, 1998,  whichever  occurs first. The
company repaid these borrowings during May 1998. See "ITEM 1. BUSINESS--Business
of Company--Other Construction  Agreements--Major Utility" of the Company's Form
10-K.

         On  March  20,  1998  the  Company  entered  into a loan  and  security
agreement  with Fun  Enterprises,  Pty Ltd.  ("Fun"),  a  current  holder of the
Company's Class B preferred stock,  relating to the development and construction
of  a  mobile,  skid-mounted  synthetic  fuel  production  facility  at  a  coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to  $5,800,000.  The interest  rate will be 12% per annum until August
31, 1998, and 15% per annum  thereafter until paid. Fun will also have the right
to receive certain  royalties after the facility is sold. As of the date of this
filing the Company has drawn $5,120,000 under this arrangement.  The loan is due
in full at the earlier of the sale of the  facility or December  31,  1999.  The
Company has entered  into a letter of intent  with the eastern  coal  company to
provide  feedstock for the plant, to operate the plant, and to provide synthetic
fuel sales services. Construction of the facility has commenced.

         On March 17, 1998,  the Company  entered into a loan agreement in which
Trans Pacific Stores,  Ltd. ("TPS") agreed to loan the Company up to $4,000,000.
The loan is  secured  by future  earned  license  fees  payable  to the  Company
resulting from the synthetic fuel manufacturing  facilities  constructed by Pace
Carbon Fuels,  LLC.  Interest on the  outstanding  principal  balance accrues at
twelve  percent  (12%) per annum.  The  interest  rate is  adjusted  to thirteen
percent  (13%) on September  20, 1998 and to fourteen  percent (14%) on December
20, 1998.  Each time the interest  rate is adjusted,  a one percent (1%) renewal
fee of  $40,000  is due and  payable.  Interest  on the  unused  portion  of the
borrowing  will accrue  interest at one percent (1%) per annum until the loan is
paid in full.  The balance and interest is due in full before March 20, 1999. As
of March 31, 1998,  $530,300 had been borrowed under this arrangement.  A member
of the Company's Board of Directors is affiliated with TPS.

                                       22
<PAGE>

Forward Looking Statements


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

             (i)           The commercial success of the Briquetting Technology.
             (ii)          Procurement of necessary equipment to place
                           facilities into operation.
             (iii)         Securing of necessary  sites,  including  permits and
                           raw materials,  for facilities to be constructed  and
                           operated.
             (iv)          Timely  construction and completion of synthetic fuel
                           facilities,  by the  placed-in-service  date June 30,
                           1998.
             (v)           Ability to obtain needed additional  capital on terms
                           acceptable to the Company.
             (vi)          Changes  in  governmental  regulation  or  failure to
                           comply with existing  regulation  which may result in
                           operational shutdowns of its facilities.
             (vii)         The  availability  of tax credits under Section 29 of
                           the  Internal   Revenue  Code  of  1986,  as  amended
                           ("Section 29").
             (viii)        The  commercial   feasibility   of  the   Briquetting
                           Technology  upon the  expiration  of  Section  29 tax
                           credits.
             (ix)          Ability to meet financial  commitments under existing
                           contractual arrangements.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             Not applicable.


                           PART II- OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

             On June 26, 1997,  Kirby Cochran,  former  President of the Company
during the period  from  September  1995  through  May 1996,  filed a  complaint
against the Company in the Fourth  Judicial  District for Utah County,  State of
Utah (Civil No. 970400507).  The complaint alleged that Mr. Cochran was entitled
to a declaratory judgment awarding him options to purchase 600,000 shares of the
Company's  stock and $50,000 as repayment  of a purported  loan.  The  complaint
further alleged claims of conversion,  fraud,  and breach of contract related to
the stock options and loan. Finally,  the complaint alleged a claim for punitive
damages and other  unspecified  special or general damages.  The Company filed a
petition  to remove  the  action to the  United  States  District  Court for the
District of Utah (Civil No.  2:97CV0587G).  On November  13,  1997,  the parties
entered into a Settlement  Agreement whereby Kirby Cochran agreed to release the
Company  from all claims  made by the  lawsuit in  exchange  for  payment on the
purported loan of $50,000.

             In January 1996, a manager of the Company entered property owned by
NEICO, a subsidiary of Nevada Power Corporation,  in connection with an offer by
the Company to purchase the property,  and with certain  other  employees of the
Company,  removed and contained over a two-day period some asbestos. The manager
allegedly failed to follow federal guidelines governing the handling and removal
of asbestos.  This action was reported to the Division of Environmental  Quality
for the State of Utah. An investigation followed in which the Company was fined

                                       23
<PAGE>

approximately  $11,000 and was required by the State of Utah to properly dispose
of the asbestos using a qualified asbestos removal company. In the fall of 1997,
the Environmental  Protection Agency began a review of the case and is currently
looking into the  advisability  of further  claims or fines  against the manager
and/or against the Company.

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


ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

             Recent Sales of Unregistered Securities


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

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

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

             In July 1997, the Company  granted  unqualified  options to acquire
10,000 shares to Don Danks and options to acquire 10,000 to Mike Vanderhoof as a
finders fee in connection with a private placement.  The exercise price is $7.00
per share. The options were actually issued in January of 1998.

             In  September  1997,  the Company  granted  unqualified  options to
acquire  25,000  shares to Don Danks and 25,000  shares to Mike  Vanderhoof as a
finders fee in connection with a private placement.  The exercise price is $9.00
per share. The options were actually issued in January of 1998.

             In February 1998, the Company granted  qualified  options under the
Company's  Stock Option Plan to acquire  20,000 shares each to two key employees
of the company. The exercise price is $11.50 per share.

             In February  1998,  the Company issued 37,500 shares of the Company
common  stock in exercise of options at $1.50 per share to certain  officers and
directors. The consideration was paid in cash.

             In February  1998,  the Company  granted  options to acquire  3,500
shares to a former employee of the Company as compensation  for past services at
$1.50 per share. Said options were exercised in the same month. Accordingly, the
Company  issued  3,500  shares of the  Company  common  stock in exercise of the
options. The consideration was paid in cash.

             In February  1998, a consultant  of the Company  exercised  options
previously  granted at $1.50 per share.  The Company  issued 3,600 shares of the
Company common stock in exercise of these options.  Subsequent to the end of the
quarter an additional  16,400 shares were issued.  The consideration was paid in
cash.

                                       24
<PAGE>

             In  March  1998,  PacifiCorp  exercised  their  option  to  convert
$7,000,000  owing under a convertible loan into shares of common stock. On March
3,  1998,   1,000,000  shares  of  the  Company  common  stock  were  issued  in
satisfaction of this loan.  Subsequent to the end of the quarter,  an additional
27,000  shares of the  Company's  common  stock were issued  pursuant to certain
antidilution provisions of the loan agreement.


             In February  1998,  the Company issued 1,000 shares of common stock
to certain accredited  investors in exercise of warrants at $8.00 per share. The
consideration  was paid in cash.  Subsequent  to the quarters end, an additional
85,117  shares of common  stock were issued to certain  accredited  investors in
exercise of warrants at $8.00. The  consideration was paid in cash. The warrants
were  originally  issued with units  privately  placed on September 30, 1997 and
October 13, 1997.


ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

                  None.

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

                  None.

ITEM 5.      OTHER INFORMATION

                  None.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

                 (a)  Exhibits

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

                    10.50.1*   Form of Amended and  Restated  License and Binder
                               Purchase Agreement dated February 3, 1998 between
                               PC Virginia  Synthetic  Fuel #1, PC West Virginia
                               Synthetic  Fuel #1,  PC West  Virginia  Synthetic
                               Fuel #2, PC West Virginia  Synthetic  Fuel #3 and
                               Covol Technologies Inc.

                    10.50.2*   Loan Agreement  between C.C. Pace Capital, L.L.C.
                               and   Carbon    Resources,    Inc.    and   Covol
                               Technologies, Inc. dated April 21, 1998.

                    10.50.3    Security  Agreement  between C.C.  Pace  Capital,
                               L.L.C.  and  Carbon  Resources,  Inc.  and  Covol
                               Technologies, Inc. dated April 21, 1998.

               Exhibit 27.1    Financial Data Schedule

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

                  (b)  Reports on Form 8-K

                           A report on Form 8-K was filed on March 3, 1998.


                                       25
<PAGE>

                                    SIGNATURE


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



Date: May 13, 1998


                                 COVOL TECHNOLOGIES, INC.



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



                                  By: /s/ Stanley M. Kimball
                                     ------------------------------------------
                                     Stanley M. Kimball, Principal Financial
                                     Officer


                                       26