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

                                    FORM 10-Q


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

                  For the quarterly period ended March 31, 1999

                                       or

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

                 For the transition period from ______ to ______

                         Commission file number 0-27803

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

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

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

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

                                 Not applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

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

The number of shares outstanding of the Registrant's  common stock as of May 14,
1999 was 12,471,985.

<PAGE>

                            COVOL TECHNOLOGIES, INC.

                                TABLE OF CONTENTS

                                                                        Page No.
PART I - FINANCIAL INFORMATION

  ITEM 1.  CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
             Consolidated Balance Sheets - As of September 30, 1998
               and March 31, 1999...........................................  3
             Consolidated Statements of Operations - For the three
               months ended March 31, 1998 and 1999 and the six months
               ended March 31, 1998 and 1999................................  5
             Consolidated Statement of Changes in Stockholders' Equity -
               For the six months ended March 31, 1999......................  6
             Consolidated Statements of Cash Flows - For the six months 
               ended March 31, 1998 and 1999................................  7
             Notes to Consolidated Financial Statements.....................  8

  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS...................................... 19

PART II - OTHER INFORMATION

  ITEM 1.  LEGAL PROCEEDINGS................................................ 25

  ITEM 2.  CHANGES IN SECURITIES............................................ 25

  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.................................. 26

  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 26

  ITEM 5.  OTHER INFORMATION................................................ 26

  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K................................. 27

SIGNATURES.................................................................. 28

Certain statements in this Report, constitute  forward-looking statements within
the meaning of the Private  Securities  Litigation  Reform Act of 1995. As such,
actual results may vary materially from current  expectations.  For a discussion
of certain  of the  factors  that  could  cause  actual  results to differ  from
expectations,  please see the information  set forth under the caption  entitled
"Forward  Looking  Statements" in ITEM 2 hereof.  There can be no assurance that
Covol's  results of operations  will not be adversely  affected by such factors.
Covol  undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers are cautioned not to place
undue reliance on these forward looking statements,  which reflect  management's
opinion only as of the date hereof.

                                       2
<PAGE>

ITEM 1.   CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>


                                          COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                                 CONSOLIDATED BALANCE SHEETS
                                                         (Unaudited)

                                                                                             September 30,      March 31,
(thousands of dollars)                                                                           1998              1999
------------------------------------------------------------------------------------------- ---------------- -----------------

ASSETS

Current assets:
<S>                                                                                             <C>              <C>   
     Cash and cash equivalents                                                                        $ 727            $6,879
     Receivables                                                                                      2,879             2,707
     Due from related party                                                                           1,012             1,706
     Inventories                                                                                      1,645             2,039
     Advances on inventories, current                                                                 2,522               473
     Notes receivable - related parties, current                                                        229               239
     Facilities held for sale                                                                        28,405            28,389
     Prepaid expenses and other current assets                                                          682               664
                                                                                            ---------------- -----------------
            Total current assets                                                                     38,101            43,096
                                                                                            ---------------- -----------------

Property, plant and equipment, net of accumulated depreciation                                       14,902            14,499
                                                                                            ---------------- -----------------

Other assets:
     Restricted investments                                                                             748               698
     Advances on inventories, non-current                                                                --             2,825
     Notes and accrued interest receivable, non-current                                               7,646             7,859
     Notes receivable - related parties, non-current                                                  2,869             2,746
     Intangible assets, net of accumulated amortization                                               3,118             3,976
     Deposits and other assets                                                                          525             1,678
                                                                                            ---------------- -----------------
            Total other assets                                                                       14,906            19,782
                                                                                            ---------------- -----------------

Total assets                                                                                        $67,909           $77,377
                                                                                            ================ =================
</TABLE>


                                   (continued)




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

                                       3
<PAGE>
<TABLE>
<CAPTION>


                                         COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED BALANCE SHEETS, continued
                                                        (Unaudited)
                                                                                             September 30,      March 31,
(thousands of dollars and shares)                                                                 1998            1999
-------------------------------------------------------------------------------------------- --------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                                             <C>              <C>   
     Accounts payable                                                                                $3,036           $2,616
     Due to related party                                                                             1,609            2,029
     Accrued liabilities                                                                              2,858            2,544
     Notes payable, current                                                                          22,049           16,689
                                                                                             --------------- ----------------
            Total current liabilities                                                                29,552           23,878
                                                                                             --------------- ----------------

Long-term liabilities:
     Notes payable, non-current                                                                      13,930           25,612
     Accrued interest payable, non-current                                                              566              206
     Notes and accrued interest payable - related parties, non-current                                  147               69
     Deferred revenues from advance license fees                                                      1,400            1,400
     Deferred compensation                                                                              236              202
                                                                                             --------------- ----------------
            Total long-term liabilities                                                              16,279           27,489
                                                                                             --------------- ----------------
            Total liabilities                                                                        45,831           51,367
                                                                                             --------------- ----------------

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

Commitments and contingencies (Note 8)

Redeemable convertible  preferred stock, $.001 par value, issued and outstanding
      0 shares at September 30, 1998 and 60 shares at March 31, 1999  (aggregate
      liquidation preference of $6,016 at March 31, 1999) (Note 6)                                       --            4,354
                                                                                             --------------- ----------------

Stockholders' equity:
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
      issued and  outstanding  316 shares at September 30, 1998 and 31 shares at
      March 31, 1999 (aggregate liquidation preference of $4,514 at March 31, 1999)                       1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and outstanding
       11,272 shares at September 30, 1998 and 12,472 shares at March 31, 1999                           11               12
     Capital in excess of par value                                                                  69,284           77,763
     Accumulated deficit                                                                            (36,177)         (45,755)
     Notes and interest receivable - related parties, from issuance of, or collateralized
       by, common stock, net of allowance                                                            (7,773)          (7,024)
     Deferred compensation from stock options                                                        (3,775)          (3,450)
                                                                                             --------------- ----------------
            Total stockholders' equity                                                               21,571           21,547
                                                                                             --------------- ----------------

Total liabilities and stockholders' equity                                                          $67,909          $77,377
                                                                                             =============== ================
</TABLE>


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

                                       4
<PAGE>
<TABLE>
<CAPTION>

                                           COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                          (Unaudited)

                                                                 Three Months Ended March 31,      Six Months Ended March 31,
(thousands of dollars, except per-share amounts)                    1998             1999             1998             1999
-------------------------------------------------------------- ---------------- ---------------- ---------------- ---------------

Revenues:
<S>                                                                <C>               <C>             <C>              <C>  
     License fees                                                       $3,586            $ 320           $4,586           $ 794
     Binder sales                                                           --              423               --             956
     Binder and coal fine sales - related party                          1,989               42            1,996             183
     Other                                                                  36              132               70             139
                                                               ---------------- ---------------- ---------------- ---------------
          Total revenues                                                 5,611              917            6,652           2,072
                                                               ---------------- ---------------- ---------------- ---------------

Operating costs and expenses:
     Cost of coal briquetting operations                                   670            2,380            1,119           5,875
     Cost of binder                                                         --              274               --             650
     Cost of binder and coal fines - related party                       1,964               10            1,972              35
     Selling, general and administrative                                 1,150            1,233            1,891           2,162
     Research and development                                               72              190              228             343
     Compensation expense from stock options, stock
          warrants and issuance of common stock                            239              163              446             325
                                                               ---------------- ---------------- ---------------- ---------------
        Total operating costs and expenses                               4,095            4,250            5,656           9,390
                                                               ---------------- ---------------- ---------------- ---------------
Operating income (loss)                                                  1,516           (3,333)             996          (7,318)
                                                               ---------------- ---------------- ---------------- ---------------

Other income (expense):
     Interest income                                                       181              306              303           1,137
     Interest expense                                                   (1,180)          (1,377)          (2,292)         (2,413)
     Minority interest in net losses of consolidated
        subsidiaries                                                        52               --              138              --
     Write-up (write-down) of notes receivable - related
        parties,  collateralized by common stock                           270             (178)             563            (749)
     Other                                                                  93             (100)             107             (76)
                                                               ---------------- ---------------- ---------------- ---------------
          Total other income (expense)                                    (584)          (1,349)          (1,181)         (2,101)
                                                               ---------------- ---------------- ---------------- ---------------

Net income (loss)                                                        $ 932          $(4,682)          $ (185)        $(9,419)
                                                               ================ ================ ================ ===============

Basic income (loss) per common share                                      $.09            $(.38)           $(.03)          $(.78)
                                                               ================ ================ ================ ===============

Diluted income (loss) per common share                                    $.07            $(.38)           $(.03)          $(.78)
                                                               ================ ================ ================ ===============
</TABLE>

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

                                       5
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     For the Six Months Ended March 31, 1999
                                   (Unaudited)

                                                                                                                                
                                                                                                                             
                                                                                                          Notes and                
                                                                                                          interest                  
                                                                                                         receivable                 
                                                                                                          -related                  
                                                                                                        parties, from              
                            Convertible Preferred     Common Stock                                       issuance of,          
                                   Stock                                                                     or          Deferred  
                            --------------------------------------------   Capital in                   collateralized  compensation
(thousands of                                                             excess of par   Accumulated     by, common     from stock
 dollars and shares)        Shares     Amount      Shares       Amount       value          deficit         stock         options   
---------------------       -------   --------    ---------    ---------  -------------   ------------  ------------- -------------
<S>                           <C>        <C>       <C>            <C>       <C>            <C>            <C>           <C>     
Balances at 
September 30, 1998             316        $1        11,272         $11       $69,284        $(36,177)      $(7,773)      $(3,775)

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

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

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

Common stock issued
for rights to 
technology                                              60          --           375

Common stock issued 
on conversion of 
preferred stock                                                                     
and in payment of 
accrued but 
undeclared dividends          (286)       --           308          --           159            (159)
      

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

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

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

Value of common 
stock warrants issued 
in connection with 
redeemable convertible 
preferred stock and 
convertible debt                                                               2,331
     
Write-down of notes 
receivable - related 
parties                                                                                          749

Amortization of 
deferred compensation 
from stock options                                                                                             325


Net loss for the 
six months ended 
March 31, 1999                                                                (9,419)
                         ----------------------------------------------------------------------------------------------------------
Balances at
March 31, 1999                  31        $1        12,472         $12       $77,763        $(45,755)      $(7,024)      $(3,450)
                         ==========================================================================================================
</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 Ended March 31,
     (thousands of dollars)                                                                             1998            1999
------------------------------------------------------------------------------------------------- ----------------- -------------
     Cash flows from operating activities:
<S>                                                                                                     <C>          <C>     
     Net loss                                                                                              $(185)       $(9,419)
     Adjustments to reconcile net loss to net cash from operating activities:
       Depreciation and amortization                                                                         178            901
       Write-down (write-up) of notes receivable - related parties                                          (563)           749
       Interest expense related to amortization of debt discount and debt issuance costs                   2,266            326
       Amortization of deferred compensation from stock options                                              446            325
       Minority interest in net losses of consolidated subsidiaries                                         (138)            --
       Loss (gain) on disposition of equipment                                                               (78)           103
       Decrease from changes in assets and liabilities, net of effects from investing and 
         financing activities                                                                             (1,918)        (2,688)
                                                                                                  ----------------- -------------
     Net cash provided by (used in) operating activities                                                       8         (9,703)
                                                                                                  ----------------- -------------

     Cash flows from investing activities:
       Purchase of property, plant and equipment and facilities held for sale                            (21,916)          (323)
       Proceeds from sale of equipment                                                                        --            170
       Purchase of rights to technology                                                                       --           (128)
       Issuance of notes receivable                                                                       (1,257)            --
       Proceeds from notes receivable - related parties                                                      119            112
       Advances on binder facility                                                                           791             --
       Decrease in restricted investment                                                                      --             50
                                                                                                  ----------------- -------------
     Net cash used in investing activities                                                               (22,263)          (119)
                                                                                                  ----------------- -------------

     Cash flows from financing activities:
       Proceeds from issuance of notes payable and warrants                                               16,338         10,498
       Payments on notes payable                                                                              --         (4,602)
       Payments on notes payable - related parties                                                          (342)           (90)
       Proceeds from issuance of preferred stock and warrants, net                                            90          6,394
       Proceeds from issuance of common stock, net                                                         1,072          3,774
       Proceeds from receivable - stock subscriptions                                                        577             --
       Proceeds from notes receivable - related parties, collateralized by common stock                      302             --
       Other                                                                                                  (3)            --
                                                                                                  ----------------- -------------
     Net cash provided by financing activities                                                            18,034         15,974
                                                                                                  ----------------- -------------
     Net increase (decrease) in cash and cash equivalents                                                 (4,221)         6,152

     Total cash and cash equivalents, beginning of period                                                  4,780            727
                                                                                                  ----------------- -------------
     Total cash and cash equivalents, end of period                                                        $ 559        $ 6,879
                                                                                                  ================= =============
     Supplemental schedule of non-cash investing and financing activities:
       Common stock issued for purchase of minority interests in subsidiaries                              $  --          $ 519
       Common stock issued on conversion of preferred stock and undeclared dividends                          --          2,159
       Common stock issued for rights to technology                                                           --            375
       Notes payable issued for rights to technology                                                          --            427
       Notes payable issued for equipment                                                                  1,153            213
       Common stock issued on conversion of notes payable and related accrued interest                     7,000             --
       Common stock issued for notes receivable - related parties                                             45             --
       Notes receivable issued for sale of synthetic fuel facility                                         6,500             --
       Preferred stock dividends not accrued or paid                                                         155            126

</TABLE>

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

                                        7
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

1.   Nature of Operations and Basis of Presentation

     Covol Technologies,  Inc. and Subsidiaries ("Covol") primary business is to
     commercialize  its  binder  technologies  which are used to  recycle  waste
     by-products  from the coal, steel and other industries into marketable fuel
     and resources. Through June 30, 1998, Covol's focus was on the construction
     of  facilities  and the licensing of its binder  technologies  to companies
     that  constructed  facilities  that convert coal fines into  synthetic fuel
     briquettes.  At March 31, 1999,  Covol and its licensees  were operating 28
     facilities in ten states at various  levels of  production,  including four
     facilities  which are using a technology that Covol acquired during the six
     months ended March 31, 1999. The four  Covol-owned  facilities are expected
     to be sold in 1999.  Covol has no  current  plans to  construct  additional
     synthetic fuel facilities.

     Covol anticipates that earned license fees or royalties from the production
     and sale of  synthetic  fuel will  continue to  increase  during  1999.  As
     production  levels increase,  sales of the binder materials by Covol to its
     licensees are expected to increase proportionately. Funds received by Covol
     from these  activities  are not expected to be  sufficient to cover Covol's
     operating  costs and expenses  until late 1999.  Any extended  delay in the
     sale of facilities  held for sale may require Covol to seek additional debt
     or equity financing.

     To provide funding for Covol's  operations and debt repayment  requirements
     until late 1999,  Covol  expects to utilize  existing  working  capital and
     excess proceeds from the sale of facilities.  During  November 1998,  Covol
     issued  common  stock and common  stock  warrants for total net proceeds of
     approximately  $3,729,000.  During January 1999,  Covol issued  convertible
     preferred  stock  and  warrants  for total net  proceeds  of  approximately
     $900,000.  During  March  1999,  Covol  issued  convertible  secured  debt,
     convertible  redeemable preferred stock and common stock warrants for total
     net proceeds of approximately  $14,800,000.  Covol believes current working
     capital, excess proceeds from the sale of facilities,  payments for license
     fees and  binder  sales,  and funds  raised in  additional  financings,  if
     necessary,  will  be  sufficient  to  fund  Covol's  operations  until  its
     operating  activities  begin  producing  positive cash flow. The ability of
     Covol to repay its debt as it matures is dependent  primarily  upon Covol's
     ability to sell the facilities  which are held for sale. Covol believes the
     sale of facilities or  extensions  of existing  debt  repayment  terms will
     enable it to meet these debt requirements.

     The  accompanying  unaudited  consolidated  financial  statements have been
     prepared in accordance with the rules and regulations of the Securities and
     Exchange  Commission.  In  the  opinion  of  management,   all  adjustments
     (consisting of normal  recurring  adjustments)  considered  necessary for a
     fair  presentation  have been  included.  The results of operations for the
     periods  presented  are not  necessarily  indicative  of the  results to be
     expected for the full year.  Certain  information and footnote  disclosures
     normally  included in  financial  statements  prepared in  accordance  with
     generally accepted accounting principles have been condensed or omitted. It
     is suggested that these  financial  statements be read in conjunction  with
     the consolidated financial statements and notes thereto included in Covol's
     Annual  Report on Form 10-K for the year ended  September  30,  1998 and in
     Covol's  Quarterly  Report on Form 10-Q for the quarter ended  December 31,
     1998.

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

     Certain prior period amounts have been reclassified to conform to the March
     31, 1999 presentation.

                                       8
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

2.   Advances on Inventories

     During 1997,  Covol  entered  into an agreement to purchase  coal fines and
     through March 31, 1999 has made payments totaling approximately $3,520,000,
     of  which  $222,000  has  been  transferred  to cost  of  coal  briquetting
     operations.   The  net  amount  paid  has  been  recorded  as  advances  on
     inventories.  Covol expects to either utilize or sell these coal fines,  at
     which time the related costs will be expensed.

     Under  the  agreement,  Covol is  obligated  to pay a total  of  $5,500,000
     between  February  1997 and May 2000 for the  removal of 2 million  tons of
     coal fines (a price of $2.75 per ton) from the property. Quarterly payments
     of approximately  $396,000 are required under the agreement.  The agreement
     also provides for removal of an  additional  500,000 tons at $2.75 per ton.
     No  payment  is  required  for  removal  of any coal fines in excess of 2.5
     million tons.

3.   Change in Carrying Value of Note Receivable

     During the three and six months ended March 31, 1999,  Covol  increased the
     allowance on the $5,000,000  face value note  receivable from a stockholder
     by  approximately  $178,000  and  $749,000,  respectively,  resulting in an
     adjusted  carrying value of $860,000 as of March 31, 1999. During the three
     and six months  ended March 31,  1998,  Covol  decreased  the  allowance by
     approximately  $270,000  and  $563,000,  respectively.  The  changes in the
     allowance  were based  solely on  changes  in the  market  value of Covol's
     common  stock and common  stock  options  held as  collateral  for the note
     receivable.  The note is  personally  guaranteed  by the  buyer of  certain
     construction  companies sold by Covol to him in 1996, and is collateralized
     by  150,000  shares of  Covol's  common  stock  held by Covol,  and also by
     options expiring in January 2006 to acquire 25,000 shares of Covol's common
     stock at $1.50 per share.  The allowance is subject to future  fluctuations
     in the value of Covol's  common stock.  During the three months ended March
     31 1999, Covol received  interest  payments totaling $225,000 from the Note
     holder.

4.   Notes Payable 
<TABLE>
<CAPTION>

     Notes payable consist of the following:

                                                                                                September 30,    March 31, 1999
   (thousands of dollars)                                                                            1998
  -------------------------------------------------------------------------------------------- ----------------- ---------------

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

  Note payable to a  corporation  bearing  interest at prime (7.75% at March 31,
  1999) plus 2%,  collateralized by plant and equipment,  principal and interest
  due December 1999.                                                                                      2,900           2,900

  Note payable to the same corporation  referred to in the preceding  paragraph,
  bearing   interest  at  6%,   principal   and  interest   due  January   2000,
  collateralized by a coal wash plant in Utah.                                                            4,263           4,288
</TABLE>

                                       9
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                                   (Unaudited)
                                   ----------
<TABLE>
<CAPTION>

4.    Notes Payable, continued

                                                                                                September 30,    March 31, 1999
   (thousands of dollars)                                                                            1998
  -------------------------------------------------------------------------------------------- ----------------- ---------------

<S>                                                                                              <C>             <C>  
  Notes payable to the same corporation referred to in the preceding paragraphs,
  bearing  interest  at 6%.  50% of  accrued  interest  due  February  2000 with
  remaining accrued interest and principal due February 2001.  Collateralized by
  a synthetic fuel facility in West Virginia, held for sale.                                             $6,680          $6,500

  Note payable to a limited  liability  company issued in conjunction with funds
  advanced for the  construction  of a synthetic fuel facility in West Virginia,
  held for sale. As of September 30, 1998,  the loan was  collateralized  by the
  facility,  bore no interest and was  originally due at the earlier of the sale
  of the facility or January 1999. In December  1998,  this entity  modified the
  terms of the note and agreed to loan to Covol additional amounts up to $1,500.
  This entity had an option to purchase the facility,  which expired unexercised
  in January 1999. Covol agreed to pay interest on all outstanding  amounts at a
  rate of 10%,  payable monthly  through June 1999.  Beginning July 1999 through
  May 2000, monthly payments of $350 will be required, with all unpaid principal
  and  interest  due in June 2000.  Alternatively,  if Covol sells the  facility
  before the loan repayment date,  Covol must repay the loan from sale proceeds.
  Also,  Covol granted  additional  collateral to the corporation in the form of
  certain license fees receivable by Covol from other synthetic fuel facilities.                          8,242           9,191

  Convertible  secured  note  payable  to  an  investment  company  issued  at a
  discount,  bearing a stated  interest rate of 2.5% on the $20,000 face amount.
  The note is due March 2004 if not earlier  redeemed or  converted  into common
  stock.  Interest is payable  semiannually  on January 1 and July 1,  beginning
  July 1, 1999. The note is collateralized by license fees payable to Covol from
  the production and sale of synthetic fuel from four synthetic fuel  facilities
  located in Virginia and West Virginia. See Note 6.                                                         --           8,921

  Note payable to a corporation  originally due June 1999,  collateralized  by a
  promissory  note  receivable and by certain future license fees  receivable by
  Covol.  Warrants to purchase  100,000  shares of common  stock were granted in
  October  1998  based  on  the  outstanding  principal  balance.  The  warrants
  originally had an exercise  price of $7.44 per share,  expired in October 2000
  and were valued at approximately  $247. The terms of this note were amended in
  May 1999 to provide  that  $1,000 of  principal  is due in  December  1999 and
  $3,000  of  principal  is due in  April  2000.  Accordingly,  $3,000  has been
  classified as long-term in the balance sheet. Interest is payable at a rate of
  22% through the  original due date of June 12,  1999.  Thereafter  interest is
  payable  monthly  at a rate of 14%.  The terms of  existing  warrants  for the
  purchase of 185,713 shares of common stock were amended to extend the exercise
  periods  for one year and to lower the  exercise  prices  to  market  value of
  Covol's  common  stock.  A member of Covol's  Board of Directors is affiliated
  with this corporation.                                                                                  4,000           4,000
</TABLE>

                                       10
<PAGE>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                                   (Unaudited)
                                   ----------
<TABLE>
<CAPTION>
4.    Notes Payable, continued
                                                                                                September 30,    March 31, 1999
   (thousands of dollars)                                                                            1998
  -------------------------------------------------------------------------------------------- ----------------- ---------------
<S>                                                                                                  <C>            <C>
  Note  payable to the same  corporation  referred  to in the  preceding  paragraph,  bearing
  interest at 14%.  Principal and accrued interest were paid in March 1999.                             $ 4,000           $  --

  Other                                                                                                      94             701
                                                                                               ----------------- ---------------
                                                                                                         35,979          42,301
       Less: current portion                                                                             22,049          16,689
                                                                                               ================= ===============
       Total non-current                                                                                $13,930         $25,612
                                                                                               ================= ===============
</TABLE>

   Substantially  all of Covol's  property,  plant and equipment and  facilities
   held for sale are  collateral  for the notes  payable.  The weighted  average
   interest  rate on notes  payable was 8.5% at September  30, 1998 and 16.8% at
   March 31, 1999.

   Interest Costs

   During the six months ended March 31, 1999,  Covol  incurred  total  interest
   cost  of  approximately   $2,413,000  (including  approximately  $326,000  of
   amortization  of debt  discount and debt  issuance  costs,  none of which was
   capitalized. During the six months ended March 31, 1998, Covol incurred total
   interest cost of approximately $2,983,000 (including approximately $2,266,000
   of non-cash  interest expense resulting from issuance of convertible debt and
   warrants at a discount), of which approximately $691,000 was capitalized.

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

                                                             Three Months Ended March 31,          Six Months Ended
                                                                                                       March 31,
  (thousands of dollars and shares, except per-share data)       1998            1999            1998             1999
  ---------------------------------------------------------- -------------- --------------- ---------------- ---------------
  Numerator:
<S>                                                              <C>         <C>                <C>           <C>     
      Net income (loss)                                               $932        $(4,682)           $(185)        $(9,419)
      Preferred stock dividends (undeclared)                           (85)           (77)             (85)           (137)
      Imputed preferred stock dividends                                 --            (40)               --            (40)
                                                             -------------- --------------- ---------------- ---------------
      Net income (loss) attributable to common
        stockholders                                                  $847        $(4,799)           $(270)        $(9,596)
                                                             ============== =============== ================ ===============

  Denominator:
      Denominator for basic income (loss) per share -
        weighted-average shares outstanding                          9,574         12,472            9,382          12,224
                                                             -------------- --------------- ---------------- ---------------
      Effect of dilutive securities:
          Common stock options                                       1,216
          Common stock warrants                                        500
          Convertible preferred stock                                  741
                                                             -------------- --------------- ---------------- ---------------
          Dilutive potential common shares                           2,457              --               --              --
                                                             -------------- --------------- ---------------- ---------------
          Denominator for diluted income (loss) per
             share - adjusted weighted-average shares
             and assumed conversions                               $12,031         $12,472           $9,382         $12,224
                                                             ============== =============== ================ ===============

  Basic income (loss) per common share                                $.09           $(.38)           $(.03)          $(.78)
                                                             ============== =============== ================ ===============

  Diluted income (loss) per common share                              $.07           $(.38)           $(.03)          $(.78)
                                                             ============== =============== ================ ===============
</TABLE>

                                       11
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

6. Financing Transaction

   On March 17, 1999, Covol completed a financing  transaction (the "Financing")
   with OZ Master Fund,  Ltd., an affiliate of the Och-Ziff  Capital  Management
   Group.  The Financing  consisted of the issuance of $20,000,000 face value of
   convertible  secured  debt,  issued at a 50%  discount,  and the  issuance of
   $6,000,000  of  cumulative  convertible  preferred  stock,  for  total  gross
   proceeds of $16,000,000. Costs related to the Financing totaled approximately
   $1,200,000,  and  consisted  of private  placement  fees of  $800,000,  legal
   expenses  of  approximately  $350,000  and other  expenses  of  approximately
   $50,000.  Warrants  for the purchase of common stock were also issued as part
   of  the  Financing.   Covol  received  net  cash  proceeds  of  approximately
   $14,800,000,  which are being  used to retire  maturing  short-term  debt and
   related accrued  interest of  approximately  $4,900,000,  for working capital
   uses and other general corporate  purposes.  So long as any debt or preferred
   stock issued in connection  with this Financing is  outstanding,  the holders
   have the  right,  as a group,  to elect  one  director  to  Covol's  Board of
   Directors.

   Convertible Secured Note Payable

   The  convertible  secured debt has a five-year  term and bears  interest at a
   stated rate of 2.5% per annum on the $20,000,000  face amount,  with interest
   payable  semiannually on January 1 and July 1, beginning July 1, 1999.  After
   consideration  of the 50%  discount and the value  assigned to warrants,  the
   imputed interest rate is  approximately  38%. The debt is redeemable by Covol
   at any time  prior to  September  17,  2001 for an  amount  equal to the face
   amount of the debt.  The debt is redeemable by Covol from  September 18, 2001
   and prior to March 17, 2002 for an amount equal to 109.85% of the face amount
   of the debt. The debt is convertible into common stock of Covol at the option
   of the noteholder at a discount to the market price at the time of conversion
   as described  below.  The debt is not  convertible  by the holder until after
   March  17,  2002  except  upon the  occurrence  of an event  of  default.  If
   converted, the number of shares into which the debt can be converted would be
   calculated  based on a price per share of  common  stock  equal to 33% of the
   then  market  price at the time of  conversion,  but not less than  $6.67 per
   share nor more than $10.00 per share. Covol's present intent is to redeem the
   debt prior to March 17, 2002,  assuming  sufficient  cash from  operations or
   future equity or debt financing is available.

   A deferred asset was recorded for the portion of financing costs allocated to
   the debt.  This  asset is being  amortized  over 30 months,  the most  likely
   period  of time  over  which  the debt is  expected  to  remain  outstanding.
   Amortization is computed using the straight-line method.  Paid-in capital was
   credited  for the  relative  value of the  warrants  directly  related to the
   issuance of debt and the  warrants  allocated  to the  issuance  of debt,  as
   compared  to the total  combined  fair  values of the  warrants  and debt.  A
   liability  was recorded  for  $20,000,000,  the face value of the debt.  Debt
   discount was recorded so as to yield a level  interest rate on the net amount
   of debt outstanding between the issue date and 30 months from the issue date.
   Each  period,  interest  expense is  recorded  consisting  of the total of 1)
   interest  expense based on the stated interest rate and the face value of the
   debt; 2)  amortization  of debt discount;  and 3)  amortization of debt issue
   costs.

   Covol will be in default of the  provisions of the debt  agreement if certain
   events occur. These events include, in addition to events commonly considered
   defaults,  incurring  one or more  judgments in excess of  $5,000,000,  which
   judgments are not discharged, stayed or otherwise satisfied within 30 days of
   the judgments, and the failure to meet certain earnings targets. The earnings
   targets apply  initially to the quarter ending December 31, 1999, and then to
   subsequent  quarterly  periods.  Consolidated  earnings of $5,000,000 or more
   before interest,  taxes,  depreciation,  and amortization,  and certain other
   adjustments  as defined in the  applicable  agreement,  are  required for the
   quarter ending December 31, 1999. In subsequent  quarters,  earnings  targets
   increase  incrementally  up to $6,500,000 for the quarter ending December 31,
   2001 and  subsequent  quarters.  There are  provisions  for the  carryover of
   earnings  which  exceed the targets to  subsequent  quarters,  if  necessary,
   subject to certain  limitations.  The debt is  collateralized by license fees
   payable to Covol from the production and sale of synthetic fuel from

                                       12
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

6. Financing Transaction, continued

   Convertible Secured Note Payable, continued

   four synthetic  fuel  facilities  located in Virginia and West Virginia.  The
   owner of these  facilities  has  entered  into  licensing  agreements  to use
   Covol's technologies in return for a royalty based on the production and sale
   of synthetic fuel, subject to prescribed adjustments.

   In the event of default, the interest rate on the debt increases  immediately
   by 1% and increases  automatically by 1% at the end of each succeeding 90-day
   period,  to the extent permitted by law, until the event is cured.  Depending
   on the  nature  of the event of  default,  in most  instances,  either 1) all
   unpaid principal and interest become  immediately due and payable;  or 2) the
   note and accrued  interest become  immediately  convertible into common stock
   and the conversion price is subject to adjustment,  based on the market price
   of  Covol's  common  stock and other  factors,  as  provided  for in the loan
   agreement.

   Redeemable Cumulative Convertible Preferred Stock

   The  preferred  stock  consists of 60,000 shares of a new series of preferred
   stock,  Series D Cumulative  Convertible  Preferred Stock, with a liquidation
   value of $100 per share.  This  series of  preferred  stock is  senior,  with
   respect to dividend rights, payments upon liquidation,  or redemption, to all
   other capital stock of Covol,  including the other series of preferred  stock
   which are outstanding or which may be issued in the future.  Dividends accrue
   at a rate of 7% per annum whether or not declared or paid. At Covol's option,
   dividends  can be paid in  additional  shares of  preferred  stock in lieu of
   cash.  Dividends are payable quarterly beginning July 1, 1999. Holders of the
   preferred  stock have voting rights as to all matters voted on by the holders
   of common  stock and are  entitled to one vote for each share of common stock
   issuable upon conversion of the preferred stock. In addition,  holders of the
   preferred stock and debt vote as a group for one director.

   The preferred stock is redeemable at Covol's option through March 17, 2002 at
   125% of its liquidation value, subject to adjustment for changes in the value
   of Covol's common stock.  The preferred  stock is redeemable at the option of
   the preferred  stockholder  only upon occurrence of a change in control.  The
   preferred  stock is convertible at the option of the  stockholders  beginning
   June 15, 1999, up to a maximum of 20% of the outstanding  shares of preferred
   stock.  Each  month  thereafter,  the amount of  preferred  stock that can be
   converted  increases by 20% until  October 13, 1999, at which time all of the
   preferred  stock can be converted  into common stock.  On March 17, 2002, all
   outstanding  preferred  stock  automatically  converts to common  stock.  The
   number  of  shares  of  common  stock  into  which  the  preferred  stock  is
   convertible  is determined by multiplying  the number of preferred  shares by
   $100 and  dividing  by the  lesser  of $5.25  or 90% of the  market  value of
   Covol's common stock on the date of conversion.

   The portion of financing  costs  allocated to the preferred stock were netted
   against proceeds.  Paid-in capital was credited for the relative value of the
   warrants directly related to the issuance of preferred stock and the warrants
   allocated  to the  issuance  of  preferred  stock,  as  compared to the total
   combined  fair  values of the  warrants  and  preferred  stock.  Because  the
   preferred stock can be redeemed by the preferred stock holders (only upon the
   occurrence of a change in control), it has been classified outside the equity
   section in the balance sheet.  Because the conversion  price of the preferred
   stock was less than the fair market value of Covol's common stock on the date
   of  issuance,  an  imputed  dividend  will  affect  the  earnings  per  share
   calculation  as it is  amortized  over the period  from issue date to date of
   first conversion.

                                       13
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

6. Financing Transaction, continued

   Warrants

   Warrants for the  purchase of a total of  approximately  1,300,000  shares of
   common  stock were issued in  connection  with the  Financing.  The number of
   shares  issuable  upon  exercise  of  the  warrants  is  subject  to  certain
   antidilution  provisions  including but not limited to the issuance of common
   stock at prices below the market price of Covol's  common stock.  Warrants to
   purchase  400,000 shares of common stock are initially  exercisable at prices
   of $5.00  per share for  200,000  shares  and  $10.00  per share for  200,000
   shares,  for the period of time beginning on March 17, 2002 through March 17,
   2004,  subject to adjustment upon the occurrence of certain events.  Warrants
   to purchase  883,626  shares of common  stock are  initially  exercisable  at
   prices ranging from $5.25 to $6.56 per share for the period of time beginning
   on September 13, 1999 through March 17, 2002,  subject to adjustment upon the
   occurrence of certain events.

   The  warrants  issued  in  this  transaction  were  valued  at  approximately
   $3,000,000 using the Black-Scholes option valuation model. Some warrants were
   issued  in  connection  with  the  convertible  debt,  some  were  issued  in
   connection  with the  convertible  preferred  stock and some  were  issued in
   connection  with  both the  debt  and  equity  securities.  The  value of the
   warrants  issued in connection  with both the debt and equity  securities was
   allocated between debt and preferred stock on a pro-rata basis,  based on the
   debt and equity portions of the total financing.

   Registration Rights

   The  restricted  common  stock  issuable  pursuant to the  conversion  of the
   convertible secured debt and related interest,  convertible  preferred stock,
   preferred  stock  dividends,  and exercise of  approximately  971,000 warrant
   shares have been  provided  demand and  piggyback  registration  rights.  The
   remaining warrants have been provided piggyback registration rights.

   Other Significant Obligations or Restrictions

   Terms  of the  agreements  entered  into by  Covol  in  connection  with  the
   Financing  provide  for  limits  and  restrictions  common to such  financing
   arrangements,   as  well  as  certain  additional  specific   limitations  or
   restrictions.

7. Equity Transactions

   Technology Acquisition

   Effective  in November  1998,  Covol  acquired a  coal-based  synthetic  fuel
   technology,  and related  licensing  and patent  rights for $128,000 in cash,
   60,000 shares of restricted  common stock valued at $375,000 and a commitment
   to make installment  payments ranging from $5,000 to $12,500 per month for 60
   months with interest  imputed at 15%. This  acquisition  transferred to Covol
   patent  ownership and licensor  rights and  obligations  to existing  license
   agreements  with a company that  sublicensed the technology to a developer of
   four synthetic fuel facilities.  The total cost of approximately  $930,000 is
   being amortized on a straight-line basis over approximately nine years.

                                       14
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

7. Equity Transactions, continued

   Sale of Series C Convertible Preferred Stock

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

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

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

   The new and extended warrants were valued at approximately $500,000. Issuance
   costs were netted against  proceeds and paid-in  capital was credited for the
   relative value of the warrants, as compared to the total combined fair values
   of the warrants and preferred stock.

   Stock Options

   During the six months ended March 31,  1999,  Covol  granted  options for the
   purchase  of a total of  382,000  shares of  common  stock.  Options  for the
   purchase of 150,000 shares of common stock were granted to three officers and
   options for the purchase of 172,000  shares were granted to four  independent
   directors.  Covol also granted  options for the purchase of 60,000  shares of
   common stock to four individuals for services rendered in connection with the
   financing of a synthetic fuel facility  pursuant to a consulting  arrangement
   originally  entered  into in 1997 and revised in August 1998.  These  options
   were assigned a value of approximately $175,000 which is being amortized over
   the life of the related financing. In December 1998, three officers exercised
   options for the purchase of 30,000  shares of common  stock,  for which Covol
   received proceeds of $45,000.

                                       15
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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


8. Commitments and Contingencies

   Commitments and  contingencies as of March 31, 1999 not disclosed  elsewhere,
   are as follows:

   Letters of Credit

   During fiscal 1998, Covol entered into letter of credit  arrangements  with a
   bank that  provide  for the  issuance  of  letters of credit  totaling  up to
   $938,000. As of March 31, 1999, there were $698,000 of outstanding letters of
   credit.  Certificates  of deposit  totaling  $698,000  that are  included  in
   restricted  investments in the accompanying balance sheet collateralize these
   arrangements.

   Legal or Contractual Matters

   Included in accrued  liabilities  at September 30, 1998 and March 31, 1999 is
   $755,000  related  to  construction  contracts  that  contain a  "failure  to
   proceed" liability clause.

   In December 1996, Covol entered into indemnification agreements in connection
   with  construction  contracts for certain  synthetic fuel facilities  entered
   into between the construction contractor and independent third parties. These
   contracts  called  for  liquidated   damages  of  $750,000  per  contract  if
   construction  of the  facilities  were not  completed by June 1, 1998.  Covol
   indemnified  the  contractor  for these  potential  liabilities.  The maximum
   contingent   liability  Covol  may  have  had  under  these   indemnification
   agreements  would have been  $2,250,000.  The contractor and the  contracting
   party  initiated  claims in  arbitration  against each other but have settled
   their  claims,  including a release of claims  against  Covol for  liquidated
   damages.

   In March  1997,  Covol sold the Utah  Synfuel #1  facility  to  Coaltech.  In
   connection with this sale,  Utah Synfuel #1 licensed  Coaltech to use Covol's
   binder  technologies  for an advance  license fee of $1,400,000 and an earned
   license  fee that is  payable  quarterly  and is based  upon  synthetic  fuel
   produced and sold at the Utah  facility by Coaltech.  Covol  contracted  with
   Coaltech to operate the  facility for which Covol  receives a quarterly  fee,
   which is also based upon  synthetic  fuel produced and sold.  Coaltech has an
   option wherein they can require Covol to purchase this facility under certain
   conditions  for a price equal to fair market value,  but not to exceed 50% of
   the amounts paid to Covol by  Coaltech.  Additionally,  Covol  entered into a
   supply and  purchase  agreement  wherein  Covol agreed to provide to Coaltech
   coal fines for  processing  into  synthetic  fuel at a price equal to Covol's
   cost. Covol agreed to purchase from Coaltech the synthetic fuel produced,  at
   Coaltech's  cost plus one dollar per ton.  Based upon expected  manufacturing
   costs and  current  coal  prices,  Covol  expects  to incur a loss under this
   supply and  purchase  agreement  which will  reduce the earned  license  fees
   received.  Covol  believes that in total the earned  license fees will exceed
   the losses incurred under the supply and purchase  agreement.  Because of the
   initial  expected  losses under this supply and purchase  agreement,  revenue
   recognition of the advance  license fee of $1,400,000 has been deferred as of
   September 30, 1998 and March 31, 1999.

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

                                       16
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

8. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

   In May 1995,  Covol  entered into an agreement  with Geneva Steel  Company to
   build and operate a commercial  briquetting plant. The facility never reached
   commercial  operating levels and the equipment has been moved from the Geneva
   site.  Covol intends to use this  equipment  for the  production of synthetic
   fuel,  for  testing  purposes,  or other  potential  applications  of Covol's
   technology.

   In December 1996,  Covol entered into license  agreements  with affiliates of
   Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of Covol's binder
   technologies  at four synthetic fuel  manufacturing  facilities  developed by
   Pace. In 1998 Pace requested a reduction in the license fees payable to Covol
   under the license agreements.  Upon condition of immediate payment by Pace of
   advance  license fees,  Covol agreed to a reduction in future earned  license
   fees. This reduction was  accomplished  by a ten-year loan agreement  whereby
   Covol would loan to Pace up to $750,000  each  quarter  beginning in November
   1998.  This loan will be repaid to Covol at the end of the ten years  only if
   the Pace projects have accumulated  sufficient prescribed earnings.  Revenues
   from earned  license fees will be recognized by Covol only to the extent that
   amounts exceed the loan commitment.  Pace has requested three quarterly loans
   totaling $2,250,000.  Covol believes that its current loan obligation to Pace
   is limited to the earned  license fees  receivable  by Covol for the quarters
   ended  September  30,  1998 and through  March 31,  1999,  which  amounts are
   estimated  at  $854,000  in total.  Pace and Covol  are  renegotiating  their
   license  agreements,  which  negotiations  could result in a reduction and/or
   deferral of the receipt of future  license  royalty  payments.  Covol expects
   revised agreements to replace the ten-year loan arrangements.

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

   As  of  September  30,  1998  and  December  31,  1998,  Covol  had  recorded
   liabilities  to  The  Industrial   Company  ("TIC")  totaling   approximately
   $735,000.  In  November  1998,  Covol was  served  with two liens from TIC in
   amounts  totaling  approximately  $1,150,000  for  construction  payments TIC
   claimed were due for certain synfuel facilities. Covol increased the recorded
   liability to TIC to $945,000 as of March 31,  1999,  which amount was paid in
   April 1999 for the settlement and release of both liens.

                                       17
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

8. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

   In September  1996,  Covol entered into an agreement with Coalco  Corporation
   whereby  Coalco was to advise Covol with respect to the financing and sale of
   certain  synthetic fuel  manufacturing  facilities.  To date,  Covol has paid
   Coalco approximately $347,000 pursuant to the agreement. A dispute has arisen
   between Covol and Coalco about services  rendered or to be rendered by Coalco
   and the  amount and timing for  payment  for such  services.  There have been
   ongoing  discussions  between Covol and Coalco in an attempt to resolve their
   differences.  The potential  liability to Covol, if any, is not known.  While
   Covol's management  believes the dispute will be resolved and will not have a
   significant  financial  impact,  it can give no  assurance as to the ultimate
   effect on Covol. Pelletco, an affiliate of Coalco, is a licensee of Covol.

                                       18
<PAGE>

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

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

Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998

Revenues.  Total  revenues for the three  months  ended March 31, 1999  ("1999")
decreased  by  $4,694,000  to $917,000 as compared to  $5,611,000  for the three
months ended March 31, 1998 ("1998"). During 1999, Covol recognized license fees
totaling  $320,000 while license fees of $3,586,000 were recognized during 1998.
The license  fees in 1999  consisted  solely of earned  license  fees or royalty
payments,  while the license fees in 1998 consisted  solely of one-time  advance
license fees from several licensees. Earned license fees or royalty payments are
due quarterly  based upon  synthetic fuel produced and sold as reported to Covol
by its licensees. Advance license fees are normally due when construction of the
related synthetic fuel facility begins, when construction is completed,  or when
certain  construction  milestones or other  specified  conditions are met. Covol
expects to receive  additional advance license fees during 1999 upon the sale of
synthetic fuel  facilities  currently owned by Covol and upon the achievement of
certain production levels at two other synthetic fuel facilities. Earned license
fees or royalty  payments  are  expected to increase at a moderate  level in the
near term with increases expected in late 1999.

Covol provides  binder  material to its licensees  either at a fixed price or at
Covol's cost plus a contracted  markup.  Covol purchases binder material under a
long-term  contract  with a  large  chemical  company.  Total  binder  sales  to
non-related parties during 1999 were $423,000,  with a corresponding direct cost
to Covol of $274,000,  excluding related labor and overhead.  In 1998, Covol had
no binder sales to non-related parties. Covol had sales of binder and coal fines
to related parties during 1999 totaling  $42,000  compared to $1,989,000  during
1998.  These  revenues  resulted  primarily  from coal fines that were sold to a
related party under a non-recurring  contractual  obligation at Covol's cost, as
provided for under the binder and license agreement with this entity.

Covol expects an increase  during 1999 of production and sales of synthetic fuel
by its licensees as they improve production  capability and establish  marketing
agreements for the synthetic fuel produced.  This will result in a corresponding
increase  in  earned  license  fees or  royalty  payments  and  sales of  binder
products.  However,  Covol  cannot  assure  increases in license  fees,  royalty
payments,  and binder sales because Covol's licensees must  successfully  obtain
adequate feedstock or coal fines, process fines into synthetic fuel, and develop
markets for synthetic fuel. Covol believes that its licensees have made progress
in these  areas  during  the  quarter  ended  March 31,  1999,  but  significant
improvement is still needed and continued  progress and eventual  success cannot
be assured.

Operating Costs and Expenses. Operating costs and expenses increased by $155,000
to $4,250,000  during 1999 from $4,095,000 during 1998. Cost of coal briquetting
operations  increased  $1,710,000 from $670,000 during 1998 to $2,380,000 during
1999, and cost of binder and coal fines - related parties  decreased  $1,954,000
from $1,964,000  during 1998 to $10,000 during 1999. During 1999, Covol incurred
significantly  higher  operating  expenses  in  connection  with  the  continued
refinement and  commercialization  of the briquetting process in connection with
the 24 facilities  placed in service  during 1998,  and in  particular  the four
facilities  owned by Covol which are  currently  held for sale.  These  expenses
primarily  related to labor and operating  expenses at the four Covol  synthetic
fuel  facilities  and the wash  plant  located  in Utah,  losses  related to the
write-down of Coaltech inventory,  and costs incurred in providing assistance to
Covol's   licensees  in  resolving   ramp-up  issues  at  their  synthetic  fuel
facilities.  Covol expects to continue  incurring  operating  losses during 1999
until the four  facilities  held for sale are sold,  even  though it  expects to
realize a gain from these sales.

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

                                       19
<PAGE>

operations.  The write-down was approximately  $650,000 during 1999 and $250,000
during 1998. The excess cost per ton should decrease in the remainder of 1999 as
production volumes at the Coaltech facility increase.

Selling,  general  and  administrative  expenses  increased  $83,000  or  7%  to
$1,233,000  during 1999 from  $1,150,000 for 1998.  Except for  amortization  of
intangible  assets in 1999 and  commissions in 1998,  the largest  components of
selling,  general and  administrative  expenses for 1999 and 1998 were  payroll,
professional   services,   and  travel   expenses.   Payroll   costs   increased
approximately   $115,000   from  1998  to  1999  due  to  increased   headcount.
Amortization of intangible assets increased approximately $96,000 related to the
late 1998 exchange of common stock of Covol for limited  partnership  interests.
Commission expense decreased  $250,000 due to a nonrecurring  commission in 1998
related to a licensee relationship. Changes in the other categories from year to
year were not material.

Research and development costs increased  $118,000 to $190,000 from 1998 to 1999
primarily because Covol has focused  additional  resources on further refinement
of its binder  technologies  relative to the  synthetic  fuel  industry and to a
lesser extent as a result of the  application  of its binder  technologies  into
other areas.

Compensation expense from stock options,  stock warrants, and issuance of common
stock  decreased  $76,000 to  $163,000  for 1999 from  $239,000  for 1998.  This
expense relates to options granted in prior periods that vest over several years
and the  compensation  value that is being  recognized  as an  expense  over the
vesting  period.  This  amount is expected  to remain  relatively  level for the
remainder of 1999.

Other  Income  and  Expense.  During  1999,  Covol  had net  other  expenses  of
$1,349,000  compared to $584,000  for 1998.  This  increase of $765,000  relates
primarily  to a  change  between  periods  of  $448,000  in  the  mark-to-market
adjustment  of  the  carrying  value  of  the  related  party  note   receivable
collateralized by common stock, an increase in interest expense of $197,000; and
a loss on disposition of equipment in 1999 of $103,000.

During  1996,  Covol  sold  certain  construction   companies  and  received  as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter based upon the market value of Covol's  common stock and is
reflected in the balance sheet at the underlying  value of the collateral.  This
adjustment  resulted in a  write-down  of $178,000  during  1999,  compared to a
write-up of $270,000  during 1998 for a net change of $448,000.  As of March 31,
1999, the Note had a carrying value of $860,000.

Interest expense in 1998 of $1,180,000 consisted primarily of expense based upon
the issuance of convertible debt and warrants at a discount. Interest expense of
$1,377,000  in 1999  consisted  of  interest  accrued on notes  payable  used to
finance the  construction  of synthetic  fuel  facilities  held for sale and for
operating  needs and includes only $121,000 of  amortization  of debt  discount.
Interest expense is expected to increase by  approximately  $900,000 per quarter
as a result of the debt issued in March 1999,  which  increase will be offset by
reduced  interest  as a result  of any  future  repayments  of debt  related  to
facilities held for sale.

Net  loss.  For  1999,  the net  loss of  $4,682,000  represented  a  change  of
$5,614,000 from net income of $932,000  reported for 1998. This is primarily due
to the  significant  decrease in one-time  advance  license fee revenues and the
increase in cost of briquetting  operations.  Covol did not recognize any income
tax benefit in 1999 or 1998 since the  realization  of its deferred tax asset of
approximately   $14,000,000,   consisting   primarily  of  net  operating   loss
carryforwards, is dependent on generation of future taxable income.

Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998

Revenues.  Total  revenues  for the six months  ended  March 31,  1999  ("1999")
decreased by $4,580,000  to  $2,072,000  as compared to  $6,652,000  for the six
months ended March 31, 1998 ("1998"). During 1999, Covol recognized license fees
totaling  $794,000 while license fees of $4,586,000 were recognized during 1998.
The license  fees in 1999  consisted  solely of earned  license  fees or royalty
payments,  while the license fees in 1998 consisted  solely of one-time  advance
license fees from several licensees.

Total binder sales to  non-related  parties  during 1999 were  $956,000,  with a
corresponding  direct cost to Covol of  $650,000.  In 1998,  Covol had no binder
sales to  non-related  parties.  Covol  had sales of  binder  and coal  fines to
related  parties  during 1999 totaling  $183,000  compared to $1,996,000  during
1998.  These  revenues  resulted

                                       20
<PAGE>

primarily   from  coal  fines  that  were  sold  to  a  related  party  under  a
non-recurring  contractual  obligation at Covol's cost as provided for under the
binder and license agreement with this entity.

Operating  Costs  and  Expenses.  Operating  costs  and  expenses  increased  by
$3,734,000 to $9,390,000  during 1999 from $5,656,000  during 1998. Cost of coal
briquetting  operations  increased  $4,756,000  from  $1,119,000  during 1998 to
$5,875,000  during  1999,  and cost of binder and coal  fines - related  parties
decreased  $1,937,000 from $1,972,000 during 1998 to $35,000 during 1999. During
1999, Covol incurred  significantly higher operating expenses in connection with
the continued  refinement and  commercialization  of the briquetting  process in
connection  with  the 24  facilities  placed  in  service  during  1998,  and in
particular the operating costs of the four  facilities  owned by Covol which are
currently held for sale. These expenses primarily related to labor and operating
expenses at the four Covol  synthetic fuel facilities and the wash plant located
in Utah,  losses  related to the  writedown  of  Coaltech  inventory,  and costs
incurred in providing  assistance  to Covol's  licensees  in  resolving  ramp-up
issues at their synthetic fuel facilities.

Covol is  contractually  obligated to purchase the  synthetic  fuel  produced by
Coaltech  at cost  plus $1 per ton.  Production  of  synthetic  fuel  from  this
facility during 1999 and 1998 was not significant and accordingly,  the cost per
ton is  well  in  excess  of the  current  market  value.  These  costs  and the
corresponding  write-down of this  inventory to its market value are included in
the  cost of coal  briquetting  operations.  The  write-down  was  approximately
$1,800,000  during 1999 and $500,000 during 1998. The excess cost per ton should
decrease as 1999 production volumes at the Coaltech facility increase.

Selling,  general  and  administrative  expenses  increased  $271,000  or 14% to
$2,162,000  during 1999 from  $1,891,000 for 1998.  Except for  amortization  of
intangible assets during 1999 and commissions in 1998, the largest components of
selling,  general and  administrative  expenses for 1999 and 1998 were  payroll,
professional  services,  and travel  expenses.  Payroll  costs and  professional
services  each  increased  approximately  $150,000  from  1998  to  1999  due to
increased  headcount  and higher  legal  costs,  respectively.  Amortization  of
intangible assets increased  approximately $192,000 related to the 1998 exchange
of common stock of Covol for limited partnership  interests.  Commission expense
decreased  approximately $305,000 due primarily to a nonrecurring  commission in
1998 related to a licensee  relationship.  Changes in the other  categories from
year to year were not material.

Research and development costs increased  $115,000 to $343,000 from 1998 to 1999
primarily because Covol has focused  additional  resources on further refinement
of its binder  technologies  relative to the  synthetic  fuel  industry and to a
lesser extent as a result of the  application  of its binder  technologies  into
other areas.

Compensation expense from stock options,  stock warrants, and issuance of common
stock  decreased  $121,000 to $325,000  for 1999 from  $446,000  for 1998.  This
expense relates to options granted in prior periods that vest over several years
and the  compensation  value that is being  recognized  as an  expense  over the
vesting  period.  This  amount is expected  to remain  relatively  level for the
remainder of 1999.

Other  Income  and  Expense.  During  1999,  Covol  had net  other  expenses  of
$2,101,000  compared to $1,181,000 for 1998.  This increase of $920,000  relates
primarily  to a change  between  periods  of  $1,312,000  in the  mark-to-market
adjustment  of  the  carrying  value  of  the  related  party  note   receivable
collateralized  by common  stock,  partially  offset by an  increase in interest
income of $834,000.  Also contributing to the net increase in other expenses was
an increase in interest expense of $121,000,  a decrease in minority interest in
losses of consolidated  subsidiaries  of $138,000,  and a loss on disposition of
equipment in 1999 of $103,000.

During  1996,  Covol  sold  certain  construction   companies  and  received  as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter based upon the market value of Covol's  common stock and is
reflected in the balance sheet at the underlying  value of the collateral.  This
adjustment  resulted in a  write-down  of $749,000  during  1999,  compared to a
write-up of  $563,000  during  1998 for a net change of  $1,312,000.  A $515,000
payment  on the  Note  was due in  January  1999,  of  which  $225,000  has been
received.  The balance of the January  payment is expected to be received in the
quarter ending June 30, 1999.  Included in interest  income for 1999 is $515,000
related to this Note.

                                       21
<PAGE>

Interest expense in 1998 of $2,292,000 consisted primarily of expense based upon
the issuance of convertible debt and warrants at a discount. Interest expense of
$2,413,000  in 1999  consisted  of  interest  accrued on notes  payable  used to
finance the  construction  of synthetic  fuel  facilities  held for sale and for
operating  needs and includes only $203,000 of  amortization  of debt  discount.
Interest expense is expected to increase by  approximately  $900,000 per quarter
as a result of the debt issued in March 1999,  which  increase will be offset by
reduced  interest  as a result  of any  future  repayments  of debt  related  to
facilities held for sale.

During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama  Synfuel  #1  common  stock of  Covol  in  exchange  for  their  limited
partnership  interests.  These  exchanges,  most of which were  accounted for in
September  1998,  were  substantially  completed by November 1998, at which time
Utah Synfuel #1 became a wholly-owned subsidiary of Covol and Alabama Synfuel #1
became a 98%-owned subsidiary of Covol. As a result of these exchanges, minority
interest in the losses of consolidated subsidiaries decreased from approximately
$138,000  in 1998 to  approximately  $0 in 1999.  Covol  believes  the  combined
operations  of  these  partnerships  will  result  in  operating  losses  in the
near-term  future,  which  losses  will be  included  in  Covol's  statement  of
operations.

Net  loss.  For  1999,  the net  loss  increased  $9,234,000  from  $185,000  to
$9,419,000.  The  increase  is  primarily  due to the  significant  decrease  in
one-time  advance  license fee revenues and the increase in cost of  briquetting
operations. Covol did not recognize any income tax benefit in 1999 or 1998 since
the realization of its deferred tax asset, consisting primarily of net operating
loss carryforwards, depends on generation of future taxable income.

Liquidity and Capital Resources

Liquidity.  During the fiscal year 1998,  Covol and its licensees  completed the
construction  of and began  operations at 24 synthetic  fuel  facilities.  Covol
currently owns four facilities  which it constructed and which are being offered
for sale.  Covol  anticipates  sale of these  facilities  during the year ending
September  30,  1999.  The  majority  of the funds  received  from sale of these
facilities  will be  used to  retire  debt  that  was  incurred  principally  in
connection  with  the   construction  and  operation  of  these  facilities  and
activities  relative to the completion of the other  synthetic fuel  facilities.
Operating  expenses   associated  with  the  owned  facilities   currently  cost
approximately $600,000 per month.

Net cash used in  operating  activities  for the six months ended March 31, 1999
("1999") was  $9,703,000.  During the six months ended March 31, 1998  ("1998"),
net cash of $8,000 was provided by operations.  Substantially all of this change
in cash flow from  operations is  attributable  to the increase in net loss from
$185,000 in 1998 to  $9,419,000  in 1999.  Covol was able to fund its  operating
activities,  including the continued  refinement  and  commercialization  of its
patented binder technologies, through the incurrence of debt and the issuance of
convertible  preferred  stock,  common stock and common stock  warrants.  During
1999,  proceeds  from  the  issuance  of  notes  payable  totaled  approximately
$10,498,000,  proceeds from the issuance of preferred  stock totaled  $6,394,000
and proceeds from the issuance of common stock totaled $3,774,000.

Capital  Resources.   During  1999,   Covol's  investing   activities  were  not
significant. Investing activities in 1998 consisted primarily of the purchase of
property, plant and equipment and the four facilities held for resale, with most
of the funds for these  activities  coming from the  issuance  of notes  payable
($16,338,000)  and from working capital.  Covol believes that funds required for
investing  activities  will  continue to be  significantly  lower during 1999 as
compared to 1998 because the  construction of facilities that produce  synthetic
fuel that  qualifies for federal  income tax credits under Section 29 of the IRC
were  completed  during  fiscal 1998.  In order to receive tax credits under IRC
Section 29, the  synthetic  fuel sold must be produced at  facilities  placed in
service by June 30, 1998.

Covol's  long term  existence  depends on the  ability of Covol's  licensees  to
produce and sell synthetic fuel which will generate license fees to Covol. There
are 24 synthetic fuel plants that utilize Covol's  patented  technology and from
which Covol  intends to earn license  fees.  These  facilities  do not presently
operate at levels  needed to generate  significant  revenues to Covol.  Improved
operations  at each of these plants  depend on the ability of the plant owner to
produce  synthetic fuel that meets market  specifications in order for the plant
owner to market the

                                       22
<PAGE>

synthetic fuel. Covol is assisting the plant owners in their efforts to overcome
production and marketing problems.

Covol  anticipates that earned license fees or royalties from the production and
sale of synthetic  fuel will  continue to increase  during 1999.  As  production
levels  increase,  sales of the binder  materials by Covol to its  licensees are
expected  to  increase  proportionately.  Funds  received  by Covol  from  these
activities  are not expected to be sufficient to cover Covol's  operating  costs
and expenses until late 1999. Any extended delay in the sale of facilities  held
for sale may require Covol to seek additional debt or equity financing.

To provide funding for Covol's operations and debt repayment  requirements until
late 1999, Covol expects to utilize existing working capital and excess proceeds
from the sale of facilities. During November 1998, Covol issued common stock and
common stock warrants for total net proceeds of approximately $3,729,000. During
January 1999,  Covol issued  convertible  preferred stock and warrants for total
net  proceeds  of  approximately  $900,000.  During  March  1999,  Covol  issued
convertible  secured debt,  convertible  redeemable  preferred  stock and common
stock  warrants  for total net  proceeds  of  approximately  $14,800,000.  Covol
believes current working  capital,  excess proceeds from the sale of facilities,
payments  for license  fees and binder  sales,  and funds  raised in  additional
financings,  if necessary,  will be sufficient to fund Covol's  operations until
its operating  activities  begin  producing  positive cash flow.  The ability of
Covol to pay its debt as it matures is dependent  primarily upon Covol's ability
to sell the  facilities  which are held for  sale.  Covol  believes  the sale of
facilities or extensions of existing debt repayment terms will enable it to meet
these debt requirements.

Covol has  agreed to  certain  covenants  contained  in the  recently  completed
financing  documents.  One covenant  requires Covol to meet earnings targets for
the quarter ending December 31, 1999 and for subsequent  quarters.  Consolidated
earnings before  interest,  taxes,  depreciation and  amortization,  and certain
other  adjustments,  of $5,000,000  or more are required for the quarter  ending
December  31, 1999.  The  earnings  target  increases  in  subsequent  quarters.
Non-compliance  could  result in penalty  charges,  acceleration  of  repayment,
increased   interest  or  the  assignment  of  royalty   payments  from  related
collateral.  There are other terms and  conditions in these loan  documents that
will restrict or prohibit certain activities.

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

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

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

As a  part  of the  information  technology  systems  mentioned  above,  Covol's
computer network system was upgraded in 1998 with year 2000 compliant equipment.
The provider of the accounting software has indicated that this software package
is not currently  compliant but can be upgraded at nominal cost.  This work will
be  undertaken  during the third  quarter of fiscal 1999 and tested prior to the
close of the fiscal year.

All of the synthetic fuel facilities constructed by Covol and its licensees were
completed and placed in service  between  December 1996 and June 30, 1998,  with
the majority being  completed  during 1998. As such,  the  electronic  equipment
utilized in the facilities is of recent vintage (within 18 months of the June 30
date) and is year 2000 compliant.  Suppliers of the major  electronic  equipment
for Covol's four owned  synthetic fuel facilities

                                       23
<PAGE>

have notified Covol that their  equipment is compliant.  This includes  critical
programmable  logic  controllers,   micro-controllers   and  software  operating
packages.

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

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

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

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

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

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

Forward Looking Statements

Statements in this Item 2 regarding  Covol's  expectations that relate to future
plans,  financial results or performance and other information  presented herein
that are not purely historical in nature, constitute  forward-looking statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
Although  Covol  believes  that  its   expectations   are  based  on  reasonable
assumptions  within the bounds of its knowledge of its business and  operations,
there can be no assurance  that actual results will not differ  materially  from
its expectations.  In addition to matters affecting Covol's industry or the coal
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: Covol's ability to sell company-owned
synthetic fuel facilities,  the ability of Covol to conserve its capital through
cost reductions  until operating  revenues  exceed  expenses,  favorable IRS tax
treatment,  the ability of Covol to complete  specific  research and development
projects,  commercial  viability of  technologies,  the  availability of natural
resources and suitable raw  materials,  ability of Covol's  licensees to achieve
expected  production  levels  at the  synthetic  fuel  and  engineered  resource
facilities,  ability to market synthetic fuel and engineered resources produced,
market  penetration  by  competing

                                       24
<PAGE>

technologies,  the  ability of Covol to meet  performance  criteria  required in
financing  agreements,  and the ability of Covol to  continue  to find  suitable
partners and licensees.

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

Other Items

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



                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

Indemnification  to  Centerline.  In  December  1996,  Covol  entered  into  six
indemnification  agreements  with  Centerline  whereby Covol agreed to indemnify
Centerline  should it be required to pay liquidated  damages to PacifiCorp under
various design and  construction  agreements for six synthetic fuel  facilities.
Under the original terms of the various design and construction  agreements,  if
the  facilities  were not  completed by June 1, 1998 then $750,000 in liquidated
damages  for  each  facility  would  be  due  and  payable  by  Centerline.  The
indemnification  agreement only applied if PacifiCorp  actually decided to build
the facilities with Centerline as the design/builder.  PacifiCorp elected to not
build three of the projects,  and therefore the indemnity agreement with respect
to those  facilities  no longer  applies.  Accordingly,  the  maximum  amount of
contingent   liability  to  Covol  under  the  indemnification   agreements  was
$2,250,000  ($750,000 per design and  construction  agreement).  Centerline  and
PacifiCorp  initiated claims in arbitration  against each other but have settled
their  claims,  including  a release  of  claims  against  Covol for  liquidated
damages.

ITEM 2.     CHANGES IN SECURITIES

Recent Sales of Unregistered Securities

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

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

                                       25
<PAGE>

Covol  believes  that the  following  issuances  of shares  of  common  stock or
securities  for  contingently   issuable  common  stock  were  exempt  from  the
registration requirements of the Securities Act of 1933, as amended, pursuant to
the  exemption  set  forth in  Section  4(2) or 4(6)  thereof  or  Regulation  D
promulgated thereunder and the certificate for each security bears a restrictive
legend.  Each investor made  representations  to Covol that it was accredited as
that term is defined in  Regulation  D and that the  security  was  acquired for
investment purposes.

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

Reference is made to the sale of series C convertible preferred stock and common
stock warrants described in Note 7 to the consolidated  financial statements and
to the sale of series D redeemable  cumulative  convertible  preferred stock and
common  stock  warrants  described  in  Note  6 to  the  consolidated  financial
statements.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

None.

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

An annual  meeting of  stockholders  of Covol was held on March 17, 1999 for the
following purposes:
1.       To elect  three  class II  directors  of Covol to serve  until the 2002
         annual  meeting of  stockholders,  or until their  successors  are duly
         elected and qualified;
2.       To ratify a grant by the Board of options to purchase 250,000 shares of
         common stock to Brent M. Cook at $12.97 per share to vest pro rata over
         60 months beginning on May 1, 1998;
3.       To ratify the selection by the Board of  PricewaterhouseCoopers  LLP as
         independent  auditors of Covol for the fiscal year ending September 30,
         1999.

A total of 8,648,365  shares were voted.  The results of voting on these matters
were as  follows: 
1.       Mr. Raymond J. Weller as a class II director: for - 8,179,645; withheld
         authority - 468,720. Mr. DeLance W. Squire as a class II director:  for
         -  8,098,345;  withheld  authority  - 550,020.  Mr. Kirk A. Benson as a
         class II director: for - 8,472,274; withheld authority 176,091.
2.       To approve the 250,000 share option grant to Mr. Cook: for - 7,855,106,
         against - 434,199; abstain -- 359,060.
3.       To ratify the selection of  PricewaterhouseCoopers  LLP as auditors for
         fiscal 1999: for - 8,334,938; against - 5,915, abstain - 307,512.

ITEM 5.     OTHER INFORMATION

None.


                                       26
<PAGE>

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following exhibits are included herein:

10.59.   Secured Draw Down Promissory Note dated June 12, 1998 executed by Covol
         in favor of Trans Pacific Stores, Ltd.
10.59.1  Loan and Security Agreement dated June 12, 1998 executed by Covol in
         favor of Trans Pacific Stores, Ltd.
10.59.2  Letter Amendment dated May 6, 1999 between Covol and Trans Pacific 
         Stores, Ltd.
27.1     Financial Data Schedule

(b) A report on Form 8-K was filed on March 24, 1999.

                                       27
<PAGE>


                                   SIGNATURES

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



                                         COVOL TECHNOLOGIES, INC.



Date:  May 14, 1999                      By: /s/ Kirk A. Benson    
                                             -----------------------------------
                                         Kirk A. Benson, Chief Executive Officer
                                         and Principal Executive Officer



Date:  May 14, 1999                      By: /s/ Steven G. Stewart           
                                             -----------------------------------
                                         Steven G. Stewart, Chief Financial 
                                         Officer and Principal Financial Officer



                                       28