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 December 31, 1997

                                       OR

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

       For the transition period from _________________to _______________

                         Commission file number 0-27803

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

           DELAWARE                                     87-0547337
State or other jurisdiction of                       (I.R.S. Employer
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                  9,210,575 Shares of Common Stock
                                                      at February 12, 1998

                                        1

<PAGE>
                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                       Page No.

PART I - FINANCIAL INFORMATION

    ITEM 1.      FINANCIAL INFORMATION..................................... 3
                 Consolidated Balance Sheets - At December 31, 1997 and
                   September 30, 1997
                 Consolidated Statements of Operation - For the Three Months
                   Ended December 31, 1997 and 1996
                 Consolidated Statements of Cash Flow - For the Three Months
                   Ended December 31, 1997 and 1996
                 Notes to Financial Statements
    ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS.......................12
    ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                 RISK......................................................17

PART II - OTHER INFORMATION

    ITEM 1.      LEGAL PROCEEDINGS.........................................18
    ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS.................18
    ITEM 3.      DEFAULTS UPON SENIOR SECURITIES...........................20
    ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......20
    ITEM 5.      OTHER INFORMATION.........................................20
    ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT 27.1          FINANCIAL DATA SCHEDULE



         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
                                                                           September 30,              December 31,
                                                                               1997                       1997
                                                                         -----------------         ------------------
         ASSETS

Current assets:
<S>                                                                      <C>                       <C>               
   Cash and cash equivalents                                             $       4,780,301         $        2,565,563
   Receivables                                                                      12,595                     12,595
   Receivable - stock subscriptions                                                577,500                          0
   Inventories                                                                   1,818,991                  2,741,454
   Advances on inventories                                                       1,086,964                  1,480,960
   Notes receivable - related parties, current                                     275,516                    297,399
   Prepaid expenses and other current assets                                        51,865                     59,855
                                                                         -----------------         ------------------
Total current assets                                                             8,603,732                  7,157,826
                                                                         -----------------         ------------------
Property, plant and equipment, net of accumulated depreciation                  13,619,271                 20,512,871
                                                                         -----------------         ------------------

Other assets:
   Cash surrender value of life insurance                                          184,592                    184,592
   Note receivable                                                                       0                    812,250
   Notes receivable - related parties, non-current                               3,816,604                  3,794,721
   Deposits and other assets                                                       136,615                    138,015
                                                                         -----------------         ------------------
Total other assets                                                               4,137,811                  4,929,578
                                                                         -----------------         ------------------
Total assets                                                             $      26,360,814         $       32,600,275
                                                                         =================         ==================
</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
                                                                           September 30,              December 31,
                                                                               1997                       1997
                                                                         -----------------         ------------------
         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                      <C>                       <C>               
   Accounts payable                                                      $       1,045,147         $          974,047
   Payable for coal briquetting equipment                                        1,967,686                  1,976,564
   Due to related party                                                          1,038,667                  1,019,029
   Accrued liabilities                                                           1,023,126                    845,848
   Accrued contractor liability                                                  1,477,000                  1,400,125
   Advance on binder facilities                                                          0                    300,000
   Notes payable and convertible debentures, current                             5,247,526                  7,278,812
                                                                         -----------------         ------------------
Total current liabilities                                                       11,799,152                 13,794,425
                                                                         -----------------         ------------------

Long-term liabilities:
   Accrued interest                                                                204,402                    313,098
   Notes payable and convertible debentures, non-current                         2,900,000                  6,334,059
   Notes payable - related parties, non-current                                    489,096                    433,237
   Deferred revenues from advance licensing fees                                 1,650,000                  1,650,000
   Deferred compensation                                                           223,891                    226,803
                                                                         -----------------         ------------------
Total long-term liabilities                                                      5,467,389                  8,957,197
                                                                         -----------------         ------------------
Total liabilities                                                               17,266,541                 22,751,622
                                                                         -----------------         ------------------
Minority interest in consolidated subsidiaries                                   3,165,996                  3,080,328
                                                                         -----------------         ------------------

Commitments and contingencies (Note 10)

Stockholders' equity:
   Preferred stock:  $0.001 par value; authorized: 10,000,000 shares
issued
     Issued and outstanding 303,024 shares at September 30, 1997 and
     315,882 shares at December 31, 1997                                               303                        316
   Common stock:  $0.001 par value; authorized:  25,000,000 shares
     issued and outstanding 8,627,290 at September 30, 1997 and
     9,210,575 at December 31 1997                                                   8,627                      9,211
   Common stock to be issued: 462,285 shares at September 30, 1997
     and 0 at December 31, 1997                                                        462                          0
   Capital in excess of par value - preferred                                    5,094,634                  5,184,626
   Capital in excess of par value - common                                      41,818,549                 47,058,967
   Capital in excess of par value - common stock to be issued                    3,291,783                          0
   Accumulated deficit                                                         (32,191,556)               (33,307,951)
   Notes and interest receivable - related parties from issuance of

     or collateralized by common stock (net of allowance)                       (7,411,278)                (7,701,088)
   Deferred compensation from stock options                                     (4,683,247)                (4,475,756)
                                                                         -----------------         ------------------
Total stockholders' equity                                                       5,928,277                  6,768,325
                                                                         -----------------         ------------------
Total liabilities and stockholders' equity                               $      26,360,814         $       32,600,275
                                                                         =================         ==================
</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
                                                                               Ended                     Ended
                                                                           December 31,               December 31,
                                                                               1996                       1997
                                                                         -----------------         ------------------
Revenues:
<S>                                                                      <C>                       <C>               
   License fees                                                          $               0         $        1,000,000
   Synthetic fuel sales, net                                                       104,147                          0
   Binder sales - related party                                                          0                      7,003
   Operation and maintenance fees                                                        0                     34,622
                                                                         -----------------         ------------------

Total revenues                                                                     104,147                  1,041,625
                                                                         -----------------         ------------------

Operating costs and expenses:
   Cost of coal briquetting operations                                             364,580                    456,947
   Research and development                                                        105,067                    155,691
   Selling, general and administrative                                             807,314                    740,554
   Compensation expense on stock options, stock warrants
     or issuance of common stock                                                   312,959                    207,491
   Write-up of note receivable - related parties collateralized
     by common stock                                                              (725,000)                  (292,500)
                                                                         -----------------         ------------------
Total operating costs and expenses                                                 864,920                  1,268,183
                                                                         -----------------         ------------------
         Operating loss                                                           (760,773)                  (226,558)
                                                                         -----------------         ------------------

Other income (expense):
   Interest income                                                                 127,806                    122,003
   Interest expense                                                                (65,876)                (1,112,508)
   Minority interest in net losses of consolidated subsidiaries                     18,152                     85,668
   Other income                                                                      1,389                     15,000
                                                                         -----------------         ------------------
Total other income (expense)                                                        81,471                   (889,837)
                                                                         -----------------         ------------------
Net loss                                                                 $        (679,302)         $      (1,116,395)
                                                                         =================         ==================
Basic loss per share (Note 9)                                            $          (0.09)          $           (0.13)
                                                                         =================         ==================
Weighted average shares outstanding                                              7,711,338                  9,193,987
                                                                         =================         ==================
</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)
                              --------------------


                                                                               Three Months              Three Months
                                                                                  Ended                     Ended
                                                                               December 31,              December 31,
                                                                                   1996                      1997
                                                                             ----------------         ------------------
Cash flows from operating activities:
<S>                                                                          <C>                      <C>               
   Net loss                                                                  $       (679,302)         $      (1,116,395)
      Adjustments to reconcile net loss to net cash used in 
       operating activities:
         Depreciation and amortization                                                 51,346                     64,540
         Write-up of note receivable                                                 (725,000)                  (292,500)
         Interest expense based upon issuance of convertible debt and warrants
           at a discount                                                                    0                  1,112,508
         Amortization of deferred compensation on stock options                       312,959                    207,491
         Interest earned on notes receivable - related parties, 
           collateralized by common stock                                             (79,909)                      (310)
         Loss applicable to minority interests in subsidiaries                        (18,152)                   (85,668)
   Increase (decrease) from changes in assets:
      Receivables                                                                      (9,626)                         0
      Inventories                                                                     (54,477)                  (522,263)
      Advances on inventory                                                                 0                   (393,996)
      Prepaid expenses and other current assets                                        (6,510)                    (7,990)
      Deposits and other assets                                                      (109,358)                    (1,400)
      Accounts payable                                                                410,206                    (71,100)
      Due to related party                                                                  0                    (19,638)
      Accrued liabilities                                                             127,114                   (177,278)
      Accrued contractor liability                                                          0                    (76,875)
      Accrued interest                                                                      0                    108,696
      Advance on binder facilities                                                          0                    300,000
      Deferred compensation                                                             2,765                      2,912
                                                                             ----------------         ------------------
Net cash used in operating activities                                                (777,944)                  (969,266)
                                                                             ----------------         ------------------
Cash flows from investing activities:
   Cash paid for property, plant and equipment                                     (2,142,344)                (4,977,961)
   Proceeds for notes receivable                                                            0                   (812,250)
   Payments on notes receivable - related party                                           601                          0
                                                                             ----------------         ------------------
Net cash used in investing activities                                              (2,141,743)                (5,790,211)
                                                                             ----------------         ------------------

Cash flows from financing activities:
   Proceeds from issuance of limited partnership interests in subsidiaries            475,000                          0
   Proceeds from notes payable                                                      2,100,000                  3,094,880
   Payments on notes payable                                                         (339,440)                    (1,036)
   Payments on notes payable - related parties                                        (65,690)                   (55,859)
   Proceeds from note receivable - related parties, collateralized 
     by common stock                                                                  601,500                      3,000
   Proceeds from issuance of preferred stock, (net)                                         0                     90,005
   Proceeds from issuance of common stock (net)                                       560,000
   Proceeds from issuance of common stock to be issued (net)                           47,500                          0
   Proceeds from receivable - stock subscriptions                                           0                    577,500
                                                                             ----------------         ------------------
Net cash provided by financing activities                                           3,378,870                  4,544,739
                                                                             ----------------         ------------------
Net increase (decrease) in cash                                                       459,183                 (2,214,738)
Total cash and cash equivalents, beginning of period                                  490,106                  4,780,301
                                                                             ----------------         ------------------
Total cash and cash equivalents, end of period                               $        949,289         $        2,565,563
                                                                             ================         ==================

Supplemental schedule of noncash investing and financing activities:
    Payable for briquetting equipment                                        $              0         $            8,878
    Note payable issued for inventory                                                       0                    400,200
    Note payable issued for equipment                                                       0                  1,971,301
</TABLE>

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

                                        6
<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 September  30, 1997 and December 31, 1997,  the results of its
operations  for the three months  ended  December 31, 1996 and December 31, 1997
and its cash flows for the three months ended December 31, 1996 and December 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.

2.   Loss Per Share Calculation

During fiscal 1998 the Company adopted SFAS 128 "Earnings Per Share." Basic loss
per share is computed using only common shares  outstanding.  The computation of
diluted  loss per common share was  antidilutive  in each period for which a net
loss was presented;  therefore,  the amounts reported for basic and diluted loss
are the same for those periods.

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 months  ended  December 31,  1997,  the Company  decreased  the
allowance for impairment on the $5,000,000  face value note  receivable from two
stockholders  by $292,500 to an adjusted loan value of $1,882,500.  The increase
in the  allowance  was based upon a $1.625 per share  increase in the  Company's
common stock that collateralizes the note receivable. The estimate is subject to
future fluctuations due to market changes.

5.   Note Receivable 

On November 14, 1997, the Company entered into a financial  agreement with CoBon
Energy,  L.L.C.,  relating to the  purchase of  equipment  for a synthetic  fuel
production  facility.  The  original  agreement  provided  that the Company will
purchase  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.  As consideration for the loan, the Company  will have the  right to
receive certain royalties from the sale of 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  $812,250 for equipment as of December 31,
1997.

6.   Advance on Binder Facilities

In December  1997,  the Company  received three advances of $100,000 in December
1997  from  PacifiCorp  Syn  Fuel,  L.L.C.  for three  binder  facilities  under
construction.

                                        7
<PAGE>

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

7.   Notes Payable

A.J.G. Financial Services, Inc.

During October 1997, the Company entered into an agreement with A.J.G. Financial
Services,  Inc.  to provide  financing  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.  During the quarter  ended  December
31, 1997, the Company borrowed  $2,382,900 under this agreement.  Based upon the
market price of the Company's  stock on the date of the  agreement,  $398,222 of
interest  expense  was  recognized  during the quarter  related to the  warrants
issued.

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  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 greater 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  revised  terms an expense  of  $714,286  was
incurred  during the  quarter  for  conversion  rights  issued at a price  below
market.

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 6.84% on December
31, 1997).  The Company has drawn  $559,334  under the agreement at December 31,
1997. Amounts are due at the earlier of the closing of alternative  financing or
December 31, 1998.

Property Purchase

In October  1997,  the Company  purchased an 8,000  square-foot  site located in
Price, Utah, on which the Company's prototype  briquetting plant is located, for
$150,000. Included in the purchase was a 1,400 square-foot office building which
houses equipment. The property is subject to a 10-year $100,000 mortgage held by
the seller. The equity in the property was pledged as part of the collateral for
a $2.9 Million loan to the Company from Gallagher.

                                        8
<PAGE>
<TABLE>
<CAPTION>
                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                        ---------------------------------

8.   Stockholders' Equity

The table below  presents the activity in  stockholders'  equity from October 1,
1997 through December 31, 1997.

                                                                                                             Notes and             
                                                                                                             interest             
                                                                                                            receivable-   
                                                                                                             related             
                                                                                                            parties from    Deferred
                      Preferred Stock            Common Stock          Common Stock to be issued            issuance of,    compen-
                              Capital in                   Capital in               Capital in   Accumu-    or collater-    sation
                               excess of                    excess of                excess of    lated     alized by,      on stock
                 Share Amount par valued   Share    Amount  par valued  Share  Amount par value  Deficit    common stock    options
                 ----- ------ ----------   -----    ------  ----------  -----  ------ ---------  -------    ------------    -------
<S>              <C>     <C>  <C>        <C>        <C>    <C>          <C>     <C>  <C>       <C>          <C>         <C>         
Balance at 
October 1, 1997  303,024 $303 $5,094,634 8,627,290  $8,627 $41,818,549  462,285 $462 $3,291,783($32,191,556)($7,411,278)($4,683,247)

Common stock                               462,285     462   3,291,783 (462,285)(462)(3,291,783)
issued for  
cash received
in the previous
period 

Common stock                               121,000     122     836,127
issued for 
cash including                                                               
exercise of
stock options

Preferred stock   12,858   13    89,992
issued for 
cash (net)

Cash received in                                                                                                  3,000     
payment on                                                                                          
notes receivable
- related parties
parties from 
issuance of
common stock

Amortization of                                                                                                              207,491
deferred                                                                                                     
compensation on 
stock options

Interest earned on                                                                                                 (310)
notes receivable
- related parties
from issuance of or
collateralized by 
common stock

Interest expense                                             1,112,508
based upon issuance 
of convertible debt 
and warrants at 
a discount

Write-up of note                                                                                               (292,500)
receivable - related 
parties

Net loss for the                                                                                 (1,116,395)
quarter ended
December 31, 1997
                 ------- ---- ---------- ---------  ------ -----------     ---- ----       ---- -----------  ----------- -----------
Balance at       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)
December 31, 1997
                 ======= ==== ========== =========  ====== ===========     ==== ====       ==== ===========  =========== ===========
</TABLE>

                                        9
<PAGE>
<TABLE>
<CAPTION>

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

9.   Computation of Loss Per Share

                                                           For the Three Months Ended December 31, 1997



                                                  Income         Shares            Per-Share
                                                (Numerator)   (Denominator)          Amount
                                          -----------------   ------------       ---------------
<S>                                       <C>                 <C>                 <C>
Net Loss                                  $     (1,116,395)
Less: Preferred stock dividends accrued            (87,381)
                                          -----------------   ------------       ---------------
Loss Per Share

Net loss applicable to common             $     (1,203,776)      9,193,987       $        (0.13)
stockholders
                                          =================   ============       ===============
</TABLE>


Options to purchase 1,613,500 shares of common stock at prices between $1.50 and
$9.00 per share  were  outstanding,  net of 2,500  options  exercised  and 2,500
options issued, during the first quarter of fiscal 1998 but were not included in
the  computation of diluted EPS because the effect would have been antidilutive.
During the three months ended December 31, 1996,  options to purchase  1,366,500
shares of common stock were outstanding at prices between $1.50 and $3.50. These
options  were not  included  in the  computation  of loss per share  because any
effect would have been antidilutive.

Warrants to purchase  2,006,008  shares of common stock at prices  between $7.00
and $30.00  per share were  issued or  outstanding  during the first  quarter of
fiscal 1998, including 348,360 warrants which were issued during the quarter and
net of 3,000  warrants  which were  exercised.  These  shares were not  included
because the effect would have been  antidilutive.  During the three months ended
December  31,  1996,  warrants to purchase  840,714  shares of common stock were
issued or outstanding at prices between $1.50 and $35.00,  including issuance of
600,000  of  warrants  related  to a stock  issuance.  These  warrants  were not
included in the computation of loss per share because any effect would have been
antidilutive.

Convertible  debt of  $6,712,957  was  issued or  outstanding  during  the first
quarter of fiscal 1998.  The debt is  convertible  into 907,046 shares of common
stock.  These shares were not included because the effect would be antidilutive.
During the three months  ended  December 31,  1996,  convertible  debt  totaling
$2,100,000 was issued and convertible into 190,909 shares of common stock.  This
convertible  debt was not included in the  computation of loss per share because
any effect would have been antidilutive.

Preferred  stock  convertible  into 757,328 shares of common stock was issued or
outstanding  during the first  quarter of fiscal  1998.  These  shares  were not
included because any effect would be antidilutive.

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.

                                       10
<PAGE>

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

10.   Contingencies, Continued,

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 four contracts where the Company believes it is probable that the facilities
will not be  constructed.  As of  September  30,  1997,  the  Company  accrued a
liability  of  $1,477,000  for these  potential  penalties.  During the  current
quarter the Company paid penalties in the amount of $76,875.  Accordingly, as of
December 31, 1997, the remaining accrued contractor liability is $1,400,125.

In April 1996, the Company  entered into a sale and purchase  agreement for coal
with Alabama  Power  Company.  Due to delays  associated  with the financing and
construction  of the Alabama Plant,  the Company was unable to perform under the
contract and in February  1997  formally  terminated  the contract  with Alabama
Power  Company.  While Alabama  Power  Company has not  expressly  agreed to the
termination, it has not indicated any intent to take actions against the company
as a result of the termination,  nor does the Company believe any action will be
taken as a result of the termination.

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.  The Company believes that payment of
this amount is unlikely and have  therefor  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 Company  intends to defend the
suit.

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


11.  Subsequent Event 

On January 29, 1998, the Company entered into a loan and security agreement with
Fun  Enterprises,  Pty Ltd.  ("Fun"),  a current holder of the Company's Class B
preferred  stock,  relating to the  development  and  construction  of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern  coal  company.  The  agreement  allows  the  Company  to  borrow  up to
$5,800,000.  The interest rate will be 12% per annum until August 31, 1998,  and
15% per annum  thereafter  until  paid.  Fun will also have the right to receive
certain  royalties  after  the facility is sold.  As the date of this filing the
Company has drawn $1,800,000 on the loan. 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 and operating and synthetic  fuel  sales  services.  Construction  of  the
facility has commenced.

                                       11
<PAGE>

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

Results of Operations

Three months ended December 31, 1997 compared to three months ended December 31,
1996

     Revenues. For the quarter ended December 31, 1997, total revenues increased
by $937,478 to $1,041,625 from $104,147 for the quarter ended December 31, 1996.
There were  $1,000,000 in license fees recognized for the quarter ended December
31,  1997 as  compared  to no license  fees  recognized  for the  quarter  ended
December 31, 1996.  The $1 million in license fees  received  during the quarter
were  attributable  to advance license fees paid by A.J.G.  Financial  Services,
Inc., a wholly-owned  subsidiary of Arthur J. Gallagher & Company  ("Gallagher")
and AT Massey  ("Massey").  There was no material  production  and there were no
sales of  briquettes  in the  current  period as  compared  to net  proceeds  of
$104,147  in  briquette   sales  for  the  quarter  ended   December  31,  1996.
Notwithstanding  the Utah Plant having been placed in service in early 1997, its
production  and sales of synthetic  fuel were  significantly  stopped due to the
lack of  adequate  quality  feed stock for  production  at the Utah  Plant.  The
Company did produce  approximately 18,000 tons of synthetic fuel during calendar
year 1997; however,  due to high levels of ash in the feedstock and hence in the
end product, the synthetic fuel was not marketable. To remedy the problem of ash
content,  the  Company  has  constructed  a wash plant for the Utah Plant and is
currently going through  start-up  procedures.  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 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 related  party binder sales in the amount of $7,003 for
the quarter ended December 31, 1997. No sales of binder were made in the quarter
ended  December 31, 1996.  The Company  received  revenues  from  operation  and
maintenance fees of $34,622 for the quarter ended December 31, 1997. No revenues
from  operation and  maintenance  fees were earned in the quarter ended December
31, 1996.

     Operating  Costs  and  Expenses.  Operating  costs and  expenses  increased
$403,263 to $1,268,183 for the quarter ended December 31, 1997 from $864,920 for
the quarter ended December 31, 1996.  Operating costs and expenses  attributable
to the  briquetting  operations  increased  $92,367 to $456,947  for the quarter
ended  December 31, 1997 from $364,580 for the quarter ended  December 31, 1996.
The costs for  briquetting  operations  for the quarter ended  December 31, 1997
were more than for the quarter  ended  December  31, 1996 costs due to material,
labor and other costs for the continuing  refinement and  implementation  of the
briquetting  process and is  reflective  of the phase of  commercialization  and
operation  the  Company  was in for  the  current  quarter  as  compared  to the
comparable  period last year. A major component of such costs is attributable to
the start-up and operation of the Utah Plant for  Coaltech,  L.P., a partnership
for which the Company is the general  partner.  When Utah Synfuel #1, a Delaware
limited  partnership ("US #1"), and the Company sold the Utah Plant 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 to work through  various  operational  issues.
These costs are included in the synthetic fuel purchase commitment and therefore
are included in the cost of coal briquetting operations.  Once the wash plant is
operational and is providing  quality coal fines to the Utah Plant,  the Company
anticipates  that the costs  incurred per ton of synthetic fuel produced will be
more in line  with the  marketable  value of the  synthetic  fuel.  See "ITEM 1.
BUSINESS--Business of Company--Utah Plant" of the Company's Form 10-K.

     Research and development  costs increased $50,624 or 48% during the quarter
ended  December 31, 1997 from $105,067 for the quarter ended  December 31, 1996.
This  increase is due to the  Company's  focus of  resources  and efforts on the
commercialization of its synthetic fuel technology through: the construction and
start-up of its first full scale  briquetting  facilities,  the Utah and Alabama
Plants; the licensing of the Briquetting Technology (as defined in the Company's
Form 10-K) to other  licensees;  and the development of other projects that will
utilize the Briquetting  Technology in the manufacture of synthetic  fuels.  The
majority of the current quarter costs were principally  attributable to research
and development efforts related to the Company's synthetic fuels technology.

                                       12
<PAGE>

     Selling,  general and  administrative  expense  decreased  $66,760 or 8% to
$740,554 for the quarter  ended  December 31, 1997 from $807,314 for the quarter
ended December 31, 1996. The decrease related principally to reductions in costs
for administrative  labor and outside  professional  services.  The reduction in
these  expenses is due to the Company's use of personnel,  resources and efforts
for the commercialization of the Company's synthetic fuel technology.

     Compensation  expense on stock  options,  stock  warrants  and  issuance of
common  stock  decreased  $105,468  or 34% to  $207,491  for the  quarter  ended
December 31, 1997 from  $312,959 for the quarter  ended  December 31, 1996.  The
decrease  is   attributable  to  reduction  in  the  use  of  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 are or will be granted
by the Company will not be  "in-the-money,"  thus serving as an incentive to the
recipient of the options to add value to the Company.

     In  fiscal  1996,  the  Company  was  required,  under  generally  accepted
accounting  principles,  to write down the  discounted  $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  $2,699,575  in fiscal 1996.  For the quarter ended
December  31,  1997,  the Company was  required to write-up the Note by $292,500
resulting  from  the  change  in  the  value  of  the  Company's   common  stock
collateralizing  the Note,  compared to a write-up  of $725,000  for the quarter
ended  December  31,  1996.  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  December 31, 1997,
the Company had other income totaling  $222,671 and other expenses of $1,112,508
for net other expenses of $889,837. For the quarter ended December 31, 1996, the
Company had other income totaling $147,347 and other expenses of $65,876 for net
other income of $81,471.  Therefore,  there was a net increase in other expenses
in the current quarter over the prior year's corresponding  quarter of $971,308.
This difference is made up principally of interest expense of $1,112,508,  which
was  booked  as a result  of the  transactions  the  Company  entered  into with
PacifiCorp and Gallagher as explained below.

     During December 1997, the Company executed and 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 greater 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  revised  terms an expense of
$714,286 was incurred during the quarter for conversion rights issued at a price
below market.

     In October  1997,  the Company  entered into an agreement  with  Gallagher,
whereby  Gallagher  agreed to  finance a wash  plant  being  constructed  by the
Company to provide  washed coal fines to the Utah Plant for the  manufacture  of
synthetic  fuel.  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 was incurred.  As additional  consideration to Gallagher 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.  Based upon the issuance of  non-detachable
warrants at a price below market, $398,222 in interest expense was recognized in
the current quarter.

     Net Loss.  For the quarter ended  December 31, 1997,  the Company had a net
increase  of  $437,093  in loss from  operations.  The  increase  in net loss is
principally  attributable to: the increase in interest expense of $1,046,632 due
to the PacifiCorp and Gallagher  transactions as explained  above, and reduction
in the write-up on the note receivable  from related parties of $432,500.  These
reductions  in income  were  partially  offset by the  increase  in  revenues of
$937,478 which increase was  principally  attributable  to advance  license fees
received from Gallagher and Massey totaling $1 million.

                                       13
<PAGE>

Liquidity and Capital Resources

     Liquidity

     For the quarter ended  December 31, 1997,  management  believes the Company
continued  to make  significant  progress  in its  movement  from a  development
company to an  operating  company.  The  increase in cash used by the Company in
operating  activities  from $777,944 for the quarter ended  December 31, 1996 to
$969,266 for the quarter ended December 31, 1997 was largely due to expenditures
made by the  Company in the  commercialization  of its  Briquetting  Technology,
including assistance to licensees of the Company's technology in the development
of  projects  that will  utilize  the  Briquetting  Technology,  development  of
projects that the Company intends to construct and sell to other  entities,  and
improvement  of the binder and  process  technology  related  to  production  of
synthetic fuel. The Company was able to fund this growth principally through the
issuance of common stock, preferred stock, warrants,  debt, convertible debt and
through advance license fees received.

     Capital Resources

     During the quarter ended  December 31, 1997,  the Company met its cash flow
requirements principally through issuance of debt and convertible debt, the sale
of equity securities and from advance license fees received.  As of December 31,
1997, the Company had a working  capital  deficit of  $6,636,599,  compared to a
working capital deficit of $3,195,420 at December 31, 1996. The Company believes
that its current cash on hand,  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) cash distributions from
US #1 and Alabama Synfuel #1, a Delaware  limited  partnership  ("AS #1"); (iii)
the sale of chemical binder to plants utilizing the Briquetting Technology; (iv)
operating  fees for the  operation of  facilities  owned by third  parties;  (v)
payments on notes receivable and (vi) proceeds of equity and debt offerings will
be available and used to fund working  capital and other operating needs through
fiscal 1998.

     In the second and third  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,  or receipt of
project  financing.  Since these conditions should be met no later than June 30,
1998,  all such advance  license fees, if any,  should be received by the end of
the third fiscal quarter of 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 late in the second quarter and in the third quarter of 1998.
Accordingly,  the Company  expects  that there will be earned  license fees paid
from  production  and sales from these plants  after the third  quarter of 1998,
with more significant fees paid after the end of fiscal year 1998.

     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, 60% for US #1 and 80% for AS #1.

     The Company has contracted  with its licensees to provide binder  materials
on a cost plus basis. The Company expects to make income from the sale of binder
materials  to the Utah  Plant and the  Alabama  Plant in the  second  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

                                       14
<PAGE>

placed in service  late in the second  quarter  and 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 production at the Utah Plant.  The Company expects that there
will be other plants for which the Company will have operational  responsibility
and for which it will earn an operation  and  maintenance  fee. The Company does
not expect  that  operation  and  maintenance  fees will  constitute  a material
portion of its income.

     During   fiscal  year  1998,   the  Company   anticipates   receiving   its
proportionate  share  (60%  for US #1 and  80%  for AS #1) of  payments  made by
Coaltech and BSF (as defined in the Company's Form 10-K) for the purchase of the
Utah and Alabama Plants, respectively.

     The Company intends to seek project specific financing for the construction
of certain  synthetic  coal  facilities.  That  financing  may be in the form of
traditional debt financing,  convertible debt, debt with an interest in the cash
flow  attributable to the facility being  financed,  or financing by a potential
purchaser of the facility.  The Company and AS #1 are financing the construction
of the Alabama Plant through a convertible debt arrangement with PacifiCorp (see
details of arrangement under "Existing Debt  Arrangements"  below).  The Company
has made  initial  payments  for one  facility  through  construction  financing
provided by DTE Energy  Services,  Inc.  The Company  has made  arrangements  to
construct  a  facility  the coal  preparation  site of an eastern  coal  company
through financing obtained from Fun Enterprises Pty Ltd. (see Notes to Financial
Statements,  footnote 11,  "Subsequent  Event").  The Company has entered into a
conditional  letter  agreement  with  Gallagher  (as  defined  below),   whereby
financing for up to four facilities, subject to its approval of the facility and
other  conditions would be provided in exchange for an interest in the royalties
receivable  from the  facilities  and other fees.  The  agreement  is subject to
several  conditions  and  there  is no  assurance  that  the  financing  will be
provided. Currently, the Company anticipates that it will finance one project in
the amount of approximately $6 million through Gallagher. 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 construct the synthetic fuel facilities.

     Existing Debt Arrangements

     In May 1995,  the  Company  secured  financing  in the form of an  $825,000
master  equipment  lease  funded  by a  commercial  bank to  equip  its  initial
briquetting  plant  at  Geneva  Steel  Company's  facilities.  The  Company  has
remaining obligations for lease payments totaling $425,000 through February 2000
at which time the Company has the option to purchase the equipment from the bank
for approximately $124,000.

     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 several construction agreements.
In each agreement, the Company agreed to penalty clauses in the aggregate amount
of  $3,012,000  if they failed to build the  facilities.  The  Company  booked a
liability  as of  September  30,  1997 in the  amount  of  $1,477,000  of  which
$1,400,125  remains accrued as of December 31, 1997 for facilities that will not
or  may  not  be  built.  See  "ITEM  1.   BUSINESS--Business  of  Company-Joint
Ventures-Savage and Other Construction Agreements-Construction Penalties" of the
Company's Form 10-K.

     In December  1996,  the Company  entered  into  indemnity  agreements  with
Centerline  for  contingent  liabilities  aggregating  $4,500,000.  The  Company
believes  the maximum  contingent  liability  as of the filing of this  document
under the indemnity agreements is $2,250,000. See "ITEM 1. BUSINESS--Business of

                                       15
<PAGE>

Company--Other  Construction Agreements--  Indemnification to Centerline" of the
Company's Form 10-K.

     In December  1996,  the Company  entered  into a  Debenture  Agreement  and
Security  Agreement with  Gallagher,  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
Gallagher 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 coal 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. The  construction is being
financed  through  Gallagher.  The total  estimated  cost for the wash  plant is
approximately  $5.5 Million.  As of December 31, 1997,  the Company had borrowed
$3,440,749.  The  financing  is  evidenced  by a  promissory  note  executed and
delivered by the Company to Gallagher 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  Gallagher  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.
Based  upon the  issuance  of these  non-detachable  warrants  at a price  below
market, $398,222 in interest expense was recognized in the current quarter.

     In October 1997, the  Company  purchased an 8,000 square-foot site  located
in Price, Utah, on which the Company's  prototype  briquetting plant is located,
for $150,000.  Included in the purchase was a 1,400 square-foot  office building
which houses  equipment.  The property is subject to a 10-year $100,000 mortgage
held by the  seller.  The  equity in the  property  was  pledged  as part of the
collateral for a $2.9 Million loan to the Company from Gallagher.

     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
December  31, 1997 the Company had drawn  $5,712,917  under the Loan  Agreement.
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 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. In addition,  PacifiCorp has the
right to convert the greater of $6,000,000 or the actual amount  borrowed by the
Company up to $7 Million at a  conversion  price of $7.00 per share,  subject to
certain  adjustments  as  provided  in the  Loan  Agreement.  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.
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 could be acquired by PacifiCorp pursuant to the Loan Agreement.

                                       16
<PAGE>

     Based upon the revised terms, an expensed of $714,286 was recognized in the
current period for conversion rights issued at a price below market. 

     In the quarter ended December 31, 1997, 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 the filing of this
report, approximately $560,000 has been advanced under this financing agreement.
The  Company's  obligation  to repay the  amounts  borrowed  is  secured  by the
collateral 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  commencing  December 1, 1997. The principal  amount of the financing is
payable upon the closing of a take-out  construction  loan or December 31, 1998,
whichever  occurs  first.  See "ITEM  1.  BUSINESS--Business  of  Company--Other
Construction Agreements--Major Utility" of the Company's Form 10-K.

     On January 29, 1998, the Company entered into a loan and security agreement
with Fun Enterprises,  Pty Ltd. ("Fun"), a current holder of the Company's Class
B preferred  stock,  relating to the development  and  construction of a mobile,
skid-mounted synthetic fuel production facility at a coal preparation site of an
eastern  coal  company.  The  agreement  allows  the  Company  to  borrow  up to
$5,800,000,  The interest rate will be 12% per annum until August 31, 1998,  and
15% per annum  thereafter  until  paid.  Fun will also have the right to receive
certain royalties after the facility is sold. As of the date of this filing the
company has drawn $1,800,000 on the loan. 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 and operating  and  synthetic  fuel sales  services.  Construction  of the
facility has commenced.

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

                                       17
<PAGE>

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
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 Company intends to defend 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 issuances.

             The issuance of qualified options is required to be based on market
value.  Accordingly,  the exercise price is set based on the market price of 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,  notes,  debentures  and other  securities  were  exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the  exemption  set forth in Section 4(2) thereof and the  certificate  for each
security bears a restricted legend.

             In  September  1997,  the  Company  entered  into an  agreement  to
purchase all the outstanding  shares in Covol Australia,  Pty Ltd, an Australian
entity  licensed to use the  Briquetting  Technology in revert  applications  in
Australia. Pursuant to the agreement, in October 1997, the Company issued 30,000
shares of Company  common  stock to six  individuals  as  consideration  for the
purchase. These shares were shown as "to be issued" at September 30, 1997.

             As of September 18, 1997, the Company  privately sold 104,294 units
to three accredited  investors for an aggregate  purchase price of approximately
$2,200,000. Of the 104,294 units, 100,008 were issued during September 1997, and
4,286 were issued during  October 1997.  Each unit consisted of (i) three shares
of the Company's Series B Convertible Preferred Stock, par value $.001 per share
(the  "Series B  Preferred  Stock"),  and (ii) a warrant to acquire one share of
Company common stock, at a price of $8.00 per share. The purchase price for each
unit was $21.00. The warrants are exercisable at any time on or before September
30,  1999.  The  Series B  Preferred  Stock  sold as part of a unit  was  issued
pursuant to the terms of a Certificate  of  Designation  filed with the Delaware
Secretary of State (the "Series B Certificate of Designation"). Under the Series

                                       18
<PAGE>

B Certificate of Designation, the Series B Preferred Stock (i) accrues dividends
on a daily basis at a rate equal to the 2-year  treasury  bond rate plus one and
one-half percent (initially 7.29% per annum but subject to a one-time adjustment
on March  18,  1998) on the  liquidation  value of each  share  from the date of
issuance  until  paid or  converted  (with no  compounding  of  dividends  being
authorized)  payable  semi-annually  in the  discretion of the Company,  (ii) is
redeemable  by the  Company  at any time  after 30 days'  written  notice at the
liquidation value plus accrued and unpaid dividends,  (iii) has no voting rights
unless  specifically  authorized by the Delaware General  Corporate Law, (iv) is
convertible by the Company at any time after  September 30, 1998 at a conversion
price  of  $7.00  per  share.  The  units  were  privately  placed  pursuant  to
subscription  agreements  between the Company and the accredited  investors.  In
connection with the sale of the Series B Preferred Stock, the Company issued, as
a finders fee to two accredited  investors,  warrants to acquire an aggregate of
62,576 shares of the Company's common stock at a price of $8.00 per share at any
time prior to September  30, 1999. Of the total number of warrants and shares of
common stock issued in this private placement,  12,858 shares and 4,286 warrants
were issued during the current quarter.

             As of September 30, 1997 and October 13, 1997, the Company accepted
subscriptions  from 49  accredited  investors  for the purchase of 119,557 units
pursuant to a Confidential Private Placement  Memorandum,  dated August 28, 1997
(the  "Memorandum"),  at a price of $35.00 per unit with an  aggregate  purchase
price of approximately $4,200,000.  Each unit consisted of five shares of common
stock of the Company together with a warrant to purchase one additional share of
common  stock.  The  exercise  price of the  warrant  is $8.00 per share and the
warrant  must be  exercised  by April  30,  1998.  Pursuant  to the terms of the
Memorandum,  the  Company  has  granted  to  purchasers  of the units  piggyback
registration  rights on the shares of common stock  underlying the units and the
shares of common  stock which have or may become  issuable  from the exercise of
the warrants. In connection with the sale of the units under the Memorandum, the
Company  has agreed to issue to three  accredited  investors  finder fees in the
form of  warrants  to  acquire  an  aggregate  of up to  199,262  shares  of the
Company's  common stock at a purchase price of $8.00 per share at any time prior
to October 31, 1999. As of December 31, 1997, 597,785 shares had been issued, of
which 547,785 shares were issued in the current quarter.

             In October  1997,  the  Company  granted  options to acquire  2,500
shares  to  John  P.  Hill,  Jr.,  a  Director  of  the  Company,   as  director
compensation. The exercise price is $11.50 per share.

             In October  1997,  the Company  issued  2,500 shares in exercise of
options at $1.50 per share. The consideration was paid in cash. The options were
issued in fiscal 1995.

             In  October  1997,  the  Company  entered  into an  agreement  with
Gallagher,  whereby Gallagher agreed to finance the wash plant being constructed
by the  Company  to  provide  washed  coal  fines  to the  Utah  Plant  for  the
manufacture of synthetic fuel. 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 was  incurred.  As additional  consideration  to Gallagher for the
financing,  the Company agreed to grant warrants to purchase  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.

             In October  1997,  the Company  entered into a financial  agreement
with DTE Energy Services,  Inc.  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 6.84% on
December 31,  1997).  The Company has drawn  $559,334  under the agreement as of
December 31, 1997.  Amounts are due at the earlier of the closing of alternative
financing or December 31, 1998.

             On November  25, 1997,  the Company  issued 1,500 shares of Company
common  stock to an  accredited  investor  in  exercise of warrants at $8.00 per
share. The  consideration  was paid in cash. The warrants were originally issued
with units privately placed on September 30, 1997 and October 13, 1997.

             On December 8, 1997,  the Company  issued  1,500  shares of Company
common  stock to an  accredited  investor  in  exercise of warrants at $8.00 per
share. The  consideration  was paid in cash. The warrants were originally issued
with units privately placed on September 30, 1997 and October 13, 1997.

                                       19
<PAGE>

             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 greater 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.

             On January 29,  1998, the  Company entered into a loan and security
agreement  with Fun  Enterprises,  Pty Ltd.  ("Fun"),  a  current  holder of the
Company's Class B preferred stock,  relating to the development and construction
of  a  mobile,  skid-mounted  synthetic  fuel  production  facility  at  a  coal
preparation site of an eastern coal company. The agreement allows the Company to
borrow up to  $5,800,000.  The interest  rate will be 12% per annum until August
31, 1998, and 15% per annum  thereafter until paid. Fun will also have the right
to receive certain  royalties after the facility is sold. As of the date of this
filing the Company has drawn  $1,800,000 on the loan. The loan is due in full as
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 and  operating  and  synthetic  fuel  sales  services.
construction of the facility has commenced.
   
                         

             The Company  used the  proceeds of the  above-listed  issuances  to
finance Company operations and to pay related finder's fees.

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.

                           Exhibit 27.1  Financial Data Schedule

                  (b)  Reports on Form 8-K

                           No  current  report on Form 8-K was filed  during the
quarter.

                                       20
<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: February 17, 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

                                       21