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

                                    FORM 10-K

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

                  For the fiscal year ended September 30, 1998,

                                       or

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

                  For the transition period from _____ to _____

                         Commission file number 0-27803

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


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

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

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

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value

         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 __

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of December 17, 1998 was $59,671,125 based upon the closing
price on the Nasdaq National  Market(R) reported for such date. This calculation
does not reflect a determination that persons whose shares are excluded from the
computation are affiliates for any other purpose.

         The number of shares outstanding of the registrant's common stock as of
December 17, 1998 was 12,494,029.
                           ---------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  following  document  are  incorporated  herein  by  reference:
Portions  of  the  registrant's  definitive  proxy  statement  to be  issued  in
connection with registrant's annual stockholders' meeting to be held in 1999.


<PAGE>



                                TABLE OF CONTENTS
                                                                            Page
PART I

     ITEM 1.   BUSINESS......................................................  3
     ITEM 2.   PROPERTIES.................................................... 18
     ITEM 3.   LEGAL PROCEEDINGS............................................. 19
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 20

               EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 20

PART II

     ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS........................................... 23
     ITEM 6.   SELECTED FINANCIAL DATA....................................... 25
     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS..................................... 26
     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 32
     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 32
     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE............................32

PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 32
     ITEM 11.  EXECUTIVE COMPENSATION........................................ 32
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
               MANAGEMENT.................................................... 32
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 32

PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS 
               ON FORM 8-K................................................... 33
     SIGNATURES.............................................................. 42

Forward-Looking Statements

Statements  in this Form  10-K,  including  those  concerning  the  Registrant's
expectations regarding its business, and certain of the information presented in
this report,  constitute  forward looking  statements  within the meaning of the
Private  Securities  Litigation  Reform Act of 1995. As such, actual results may
vary  materially  from such  expectations.  For a discussion of the factors that
could cause actual results to differ from  expectations,  please see the caption
entitled  "Forward Looking  Statements" in Item 1 and 7 hereof.  There can be no
assurance  that the  Registrant's  results of  operations  will not be adversely
affected by such  factors.  Registrant  undertakes  no  obligation  to revise or
publicly   release  the  results  of  any  revision  to  these  forward  looking
statements.  Readers are cautioned not to place undue  reliance on these forward
looking  statements,  which  reflect  management's  opinion  only as of the date
hereof.

                                       2
<PAGE>

                                     PART I


ITEM 1.           BUSINESS

The Company

         Covol Technologies Inc. is a technology  development company focused on
"Recycling Yesterday's Waste into Tomorrow's Resources."(TM)

Company History

         Covol was  originally  incorporated  in  Nevada in 1987  under the name
Cynsulo,  Inc.  Subsequently,  the  company  acquired  all  of  the  issued  and
outstanding shares of McParkland  Corporation and changed its name to McParkland
Properties,  Inc. The purchase of McParkland was rescinded in February 1989, and
the  company's  name was changed to  Riverbed  Enterprises,  Inc.  In 1991,  the
company  acquired   technology   consisting  of  binding  agents  used  to  make
briquettes.  From  1991  to  1995  the  company  focused  on  the  research  and
development  of  binding  agents  principally  for  iron,  coal and  coke  waste
particles. The company's name was changed to Enviro-Fuels Technology in 1991, to
Environmental   Technologies   Group   International   in  1994,  and  to  Covol
Technologies,  Inc. in 1995,  at which time the company  was  reincorporated  in
Delaware.

         In  1995,  management  of Covol  recognized  the  applicability  of its
technology to the production of synthetic fuel. Since 1996, the primary focus of
Covol has been on developing and commercializing the synthetic fuel technology.

Background

         As  a  result  of  efforts  by  government   and  business  to  balance
environmental  concerns  with the needs of business  and  recognize  the need to
efficiently use diminishing resources,  the recycling industry has developed and
pursued many  endeavors to recycle,  recover  and/or  enhance the  usefulness of
wastes and by-products. Covol has developed a family of binder technologies used
to form fine materials from wastes and  by-products  into  briquettes to capture
their inherent resource value.

         Coal  mines,  ferrous  and  non-ferrous  metals  producers,  and  other
industries  produce waste and other by-products.  Cost-effective  processes have
not been  implemented  generally  to capture and use many such  wastes,  despite
their potential  usefulness and potential value. Storage and disposal of many of
these by-products is costly and can be environmentally  harmful.  Covol's binder
technologies  are designed to enable the conversion of by-products from the coal
and metals  industries into valuable fuels and resources.  Covol's primary focus
over the past two years has been the commercialization of the application of its
binder technologies to coal fines.

         Covol's binder technologies are being used to transform coal fines into
a usable  fuel.  Coal  fines are small  particles  of coal  produced  as a waste
by-product of coal production. Coal fines can be found throughout coal producing
regions of the United States and the world.  A recent study of the coal industry
estimated  that  there are more than 2 billion  tons of coal fines  residing  in
waste ponds and landfills in the United States alone. Millions of tons are added
to this amount each year.  Although coal fines have  inherent  fuel value,  they
present recovery and handling  challenges that make it difficult to capture that
value. Covol's binder technologies molecularly bond the coal fines into a formed
fuel.  Because  this  process is  accomplished  through a  significant  chemical
reaction, the resulting product has been classified as a "synthetic fuel" within
the meaning of Section 29 of the U.S.  Internal  Revenue Code. Sales of the fuel
therefore  qualify for a  significant  tax credit.  The  resulting  fuel is more
easily  handled and  transported  than are coal fines.  The  composition  of the
resulting  fuel varies in its potential  heat,  ash and sulfur content and other
characteristics, depending primarily upon the composition of the coal fines used
as feedstock,  and secondarily on the processing of the feedstock.  The possible
end markets for the resulting  synthetic  fuel are as diverse as the markets for
coal. Different end users have different requirements for fuel type and quality,

                                       3
<PAGE>

whether  the fuel be  synthetic  or coal.  The  application  of  Covol's  binder
technologies  can be  customized  to address the specific  needs of  prospective
customers.

         The Covol binder  technologies  can also be used to transform coke dust
into formed coke. Coke, which is processed metallurgical coal, is primarily used
in the iron making  process as a reducing  agent and also as an economical  fuel
source.  Coke dust,  also known as "coke  breeze," is a fine residue  by-product
resulting from the production, handling and storage of coke and is marketable in
its "dust" state because of its high carbon and energy content.  In tests, Covol
has  succeeded  in  aggregating  coke  dust  into hard  briquettes  designed  to
withstand  the  weight,  heat and other  environmental  factors  inside of metal
making furnaces,  which appear potentially  marketable at prices above briquette
production costs.

         The Covol  binder  technologies  can also be used to convert  iron rich
wastes into usable iron.  Mill scale,  bag-house  dust,  furnace  sludge,  blast
furnace dust and other iron rich materials, are all waste by-products created by
steel producers.  These by-products present environmental problems for the steel
industry.  Because of their  high iron  content,  they also have high  potential
value. Approximately 775 million tons of finished steel are consumed annually in
the world with the U.S. producing approximately 100 million tons. The capture of
even a fraction of the waste and other  by-products of this steel  production in
the  U.S.  alone  could  provide  millions  of tons of  feedstock  material  for
processing.   On  a  test  basis,  the  Covol  binder   technologies  have  been
demonstrated to be capable of producing  briquettes  from such steel  production
wastes.  Such briquettes can be further  processed in metal reducing furnaces to
form high  grade  pig iron,  a common  form of feed  material  used in the steel
industry.

         Additional  fuel or  resource  by-products  to which the  Covol  binder
technologies  appear  applicable  after  initial  testing  include:  molybdenum,
silicon  carbide,  grinding swarf,  lead dross,  zinc oxide,  titanium  dioxide,
phosphorous,  and  charcoal.  Briquettes  containing  these  by-products  appear
potentially  marketable to ferrous and non-ferrous metals producers and to other
industrial consumers.

         Except for synthetic  fuel  production,  the Covol binder  technologies
listed above have not been commercially  applied. No assurance can be given that
Covol will be able to implement these applications profitably.

Covol Binder Technologies

         The Covol binder  technologies  are  designed to aggregate  and process
wastes and other  by-products that are in a fine  particulate  state into usable
fuels and  resources in the form of  briquettes,  pellets or  extrusions.  These
technologies   also  provide  a  way  to  "engineer"  fuels  or  resources  with
value-added qualities, such as moisture reduction, elimination or neutralization
of pollutants  such as sulfur dioxide and nitric oxide,  improvement of handling
strength,  reduction of impurities,  and formation into uniform shapes and sizes
to maximize efficiencies in combustion or in processing.  The resulting products
manufactured  using the Covol binder  technologies  are broadly  categorized  as
"engineered fuels" and "engineered  resources" and can be marketed to utilities,
ferrous and nonferrous metal producers, and other major industrial users.

         The Covol binder technologies  chemically bond together fines,  sludge,
and dust such as coal fines, iron production wastes and coke dust that up to now
have been considered by-products and waste materials. The process, in simplified
terms,  mixes the  resource-rich  wastes or other  by-products  with a  chemical
formula. The mixed materials are conveyed into a briquetter,  a pelletizer or an
extruder which utilizes  pressure  together with a chemical reaction to bond and
shape the materials into the desired size and density  required for the specific
application.  The  materials may be processed  further to meet  specific  market
requirements.

         Covol has licensed its  technology to other parties to produce and sell
the  products  manufactured  with  the  Covol  binder  technologies.  Covol  has
contracted with Dow Chemical  Company to produce  chemical binder  materials for
the production of synthetic fuel made from coal fines.  Substantially all of the
equipment and machinery used for producing synthetic fuel is considered standard
or  "off-the-shelf"   and  is  commercially   available  both  domestically  and
internationally.

                                       4
<PAGE>

         Covol has been issued seven U.S.  patents and four foreign  patents and
has other U.S. and foreign patents pending. The patented technology  principally
relates to the  application of Covol's binder  technologies  to iron  production
wastes, coke, coal and other carbon based materials.  Covol is in the process of
expanding  the existing  patents and  applying for new patents  related to waste
recovery  applications.  See "ITEM 1. BUSINESS - Proprietary  Protection"  for a
discussion of Covol's patents, trademarks and other intellectual property.

Business Strategy

         The Covol binder  technologies  represent  the  foundation  for Covol's
business  strategy.  Covol believes that its success depends upon its ability to
engineer  industrial  wastes and other  by-products into  value-added  fuels and
resources.  Covol  has  divided  its  strategy  into  four  general  approaches:
engineered fuels,  engineered resources,  licensing and technology transfers and
strategic acquisitions.

         Engineered Fuels.  Engineered fuels include fuels recovered or enhanced
primarily from carbon based materials.  The Covol binder technologies provides a
use for fuel-rich  wastes and by-products by aggregating  them into a solid form
for improved handling and processing, and by making such modifications as may be
required for a given  application of the resulting  fuel,  for example,  reduced
moisture,  increased  hardness or enhanced  energy content.  Covol's  engineered
fuels include the production of fuel from briquetted  coal fines,  coke dust and
silicon carbide.

         For the past two  years  Covol's  business  strategy  has been  focused
almost  exclusively upon synthetic fuel from coal fines.  There are currently 24
synthetic  fuel  facilities  located  in 8  states  that are  utilizing  Covol's
synthetic fuel  technology.  Twenty of the facilities are owned by  unaffiliated
third parties and four are currently owned by Covol.  Two of the four facilities
owned by Covol are under options to sell to licensees  that would be expected to
pay  royalties  to  Covol.  Covol  does  not  expect  one of the  options  to be
exercised.  Covol is actively  pursuing the sale of the four  facilities.  Covol
intends  to sell all or part of each  facility  that  Covol  owns.  Covol has no
current  ability to use the potential tax benefits that Covol's  facilities  can
produce.

         Most of the  synthetic  fuel  facilities  were  initially  placed  into
operation in the second calendar quarter of 1998 and Covol and its licensees are
currently in the process of ramping up production  and entering  into  contracts
for product  sales.  Covol is working  with its  licensees  to secure coal fines
feedstock,  improve production and refine its chemical  formulas.  Covol and its
licensees are also negotiating  sales and marketing  contracts for the synthetic
fuel. Several of the owners of facilities are building or contemplating building
wash plants to wash the coal fines which are then processed into synthetic fuel.
Feedstock  supply,  production  and  product  quality and the  marketing  of the
synthetic  fuel all  directly  affect the amount and timing of  royalties  to be
received by Covol from the synthetic  fuel  facilities.  Accordingly,  assisting
licensees to optimize the production from these facilities is currently  Covol's
highest priority.

         Covol has received  one-time  advance license fees with respect to most
of the synthetic fuel facilities. In the future, most of the revenues related to
such  facilities are expected to come from royalties that are tied to production
and sale of synthetic fuel pursuant to licensing agreements in place. Covol also
expects  to  generate  net  revenues  from the sale of binder  materials  to the
facilities.

         Covol believes that the Covol binder  technologies  may also be applied
profitably  without the benefit of a tax credit.  There are  millions of tons of
coal fines in the U.S. and internationally  that could be washed and briquetted,
and,  in the  opinion  of Covol,  sold at a  reasonable  profit  above the fines
purchase and processing costs.  Additionally,  the Covol binder technologies are
well-adapted  to the  processing  of "ultra  fines," the face powder  sized coal
fines created in preparing coal for industrial use. Ultra fines can be recovered
by equipping  coal  preparation  facilities  with modern float cell  technology.
These  ultra  fines  have  historically  been  slurried  into  waste  ponds and,
depending upon the preparation facility,  might constitute as much as 10% of the
processed  coal.  The Covol binder  technologies  allow for the recovery of such
fines by removing the high levels of moisture they contain and forming them into
a solid product that can be handled and sold.  Finally,  there are certain coals
with high  inherent  moisture  levels,  such as Powder  River Basin  coals.  The
processing  of these  coals with the Covol  binder  technologies  may reduce the
moisture   levels,   thus   increasing   heat  content,   improving   combustion
efficiencies, and

                                       5
<PAGE>

reducing  transportation  costs because of the reduced weight.  Covol intends to
aggressively pursue these and other similar synthetic fuel applications.

         Another  engineered fuel application Covol is pursuing is coke. Coke is
processed metallurgical coal which serves as both a fuel and a reducing agent in
iron and steel  making.  The  production  and  handling  of coke  produces  fine
particles of coke dust. The  aggregation of coke dust into  briquettes  that are
designed to withstand  the rigors of  handling,  heat and weight in metal making
furnaces results in a useable fuel. Covol has patented  technology and is in the
process of  patenting  additional  technology  related to coke dust  processing.
Covol has acquired property where coke and coke dust has been landfilled.  Covol
intends to recover  this coke and to briquette a portion of it for use as a fuel
as described above.

         Silicon carbide is a product  manufactured from a blend of carbon based
materials  and  high  silica  sand.  In  addition  to its  principle  use in the
abrasives industry,  silicon carbide is also used as an alloy and a high-quality
fuel in specialized metal making applications. This application is covered under
existing and applied-for  patents.  Covol has not yet applied the aggregation of
silicon carbide in a full-scale operation.

         Engineered Resources. Steel mills, nonferrous metal producers and other
mineral  industries  produce  wastes  and  other  by-products  that may  contain
valuable  unrecovered   resources.   These  wastes  often  create  environmental
compliance, storage and disposal problems. The Covol binder technologies provide
a way to solve disposal problems,  extract the inherent  resources,  process the
materials  with  current  industrial  methods,  and enhance the  materials  with
qualities that add value and that customize the materials for alternative  uses.
The resulting products are collectively  referred to as "engineered  resources."
Covol  has not  yet  commercially  applied  the  Covol  binder  technologies  in
engineered  resources.  However,  Covol has  devoted  significant  research  and
development  resources to improving  and  perfecting  its  technology  for these
applications, particularly in the processing of iron production wastes.

         During the steel-making process, steel mills produce, among other waste
by-products,   small  particles  of  iron-rich   materials.   The  Covol  binder
technologies  are able to bind  such  particles  into  briquettes  which  can be
further  processed in reducing furnaces to reclaim the iron and other materials.
Covol  believes  that  products  produced  from such wastes could be marketed at
prices which are competitive with other sources of iron and that this technology
will be  attractive in  addressing  the  environmental  issues  surrounding  the
disposal of waste by-products generated in the steel making process.

         Covol will seek to enter into collaborative arrangements with steel and
iron producers to build, equip and operate  briquetting and processing plants at
the producers'  facilities.  Covol believes that such  arrangements will benefit
both Covol and the metal producers because they will:

o        provide Covol  with  an  ongoing  supply of  inexpensive  iron  tailing
         materials while ensuring a ready customer for the briquettes produced;

o        provide the steel producer with an economical means to dispose of waste
         materials  while  providing a ready  source of  briquettes  and/or iron
         feedstock; and

o        minimize transportation costs for waste by-products,  raw materials and
         briquettes,  thereby increasing the economic competitiveness of Covol's
         products.

         Covol has  developed  and  tested  its  technologies  with  other  fine
particulate  wastes  and  other  by-products,  including:  molybdenum,  titanium
dioxide,  grinding swarf, lead dross, zinc oxide and phosphorous.  Covol intends
to continue to evaluate these and other engineered resource applications.

         Licensing and Technology Transfer. Covol believes that the Covol binder
technologies  include  valuable  intangible  properties  in the form of patents,
processes,  formulations and know-how. Covol intends to devote significant human
and capital  resources in the continued  development  and  refinement of various
applications of these technologies.  Covol hopes to augment its own efforts with
technical support from major suppliers of binding

                                       6
<PAGE>

materials.  Covol has entered into licensing  agreements  with third parties for
the use of its  synthetic  fuel  technology.  Covol  intends to actively  pursue
additional  licensing,  joint venture and other collaborative  arrangements with
coal,  coke,  ferrous  and  non-ferrous  metals  producers  and  other  resource
producers to utilize Covol's technologies in recycling,  recovering or enhancing
fuels and resources from wastes and other  by-products,  both  domestically  and
worldwide.

         Strategic Acquisitions. Covol believes that it has a unique opportunity
to  pursue   acquisitions  that  are  synergistic  with  Covol's  financial  and
environmental  objectives and initiatives.  The Covol binder technologies may be
applied to waste streams that are otherwise of little or no value. Covol intends
to pursue possible acquisitions of businesses aligned to the industries in which
the Covol binder technologies may be applied.

         Covol  intends to broaden its position in the  synthetic  fuel industry
and  other  resource   industries   through  the  acquisition  or  licensing  of
technologies that are complementary to the Covol binder technologies.

Subsidiaries

         Covol has organized various special purpose entities to facilitate some
of the transactions  relating to the 24 synthetic fuel facilities.  The entities
are listed with  Covol's  position and interest in the entity as of December 31,
1998 described as follows:

o        Alabama Synfuel #1 Ltd., a Delaware limited  partnership of which Covol
         serves as general partner and owns 98%

o        Utah Synfuel #1 Ltd., a  Delaware limited  partnership of  which  Covol
         serves as general partner and owns 100%

o        Flat Ridge Corporation, a Utah  corporation, a  wholly-owned subsidiary
         of Covol

o        Commonwealth Synfuel, L.L.C., a Utah limited liability company of which
         Covol is managing member and owns 100%

         The following chart illustrates  Covol's corporate  structure.  Covol's
ownership of each subsidiary is 100% unless otherwise indicated.



                      [CHART OMITTED DESCRIBED AS FOLLOWS]

[Chart with box centered containing the word "Covol." A line is drawn proceeding
down from that box which divides into four branches, each of which terminates in
one of four boxes, all aligned horizontally, labeled respectively as follows:

o        Alabama Synfuel #1 Ltd. (98% owned)

o        Utah Synfuel #1 Ltd.

o        Flat Ridge Corporation

o        Commonwealth Synfuel, L.L.C.]


Tax Credits

         Section 29 of the U.S.  Internal Revenue Code provides a credit against
regular  federal  income  tax with  respect  to sales  of  qualified  fuel to an
unrelated  party.  Where  more than one person has an  interest  in a  qualified
facility,  the  Section 29  Credits  generated  by the  facility  are  allocated
pursuant to the proportional interests of such persons in the facility.

                                       7
<PAGE>


         In order to qualify as a solid  synthetic  fuel  produced from coal for
purposes of the Section 29 credit,  the fuel produced must differ  significantly
in  chemical  composition,  as opposed  to  physical  composition,  from the raw
material used to produce it. Covol has received a Private Letter Ruling, or PLR,
from the IRS in which  the IRS,  based on  representations  made to it by Covol,
ruled that the synthetic fuel technology produces a significant  chemical change
compared to coal fines and this  qualifies the end product as a solid  synthetic
fuel. Accordingly the IRS has ruled, based on the facts presented to it, that:

o        Covol, with  the use  of its  patented process,  produces a  "qualified
         fuel" within the meaning of Section 29 of the tax code; and

o        assuming the other  requirements of Section 29 are met, the sale of the
         "qualified  fuel" will entitle  Covol to claim the Section 29 credit in
         the taxable year of sale.

         In its ruling,  the IRS noted that no  temporary  or final  regulations
pertaining  to one or more of the issues  addressed in the PLR have been adopted
and that the PLR would be modified or revoked by the  adoption of  temporary  or
final  regulations  to the  extent the  regulations  are  inconsistent  with any
conclusions  in the PLR.  The IRS notes,  however,  that a PLR is not revoked or
modified retroactively, except in rare and unusual circumstances, provided that:

o        there has been no misstatement or omission of material facts,

o        the facts at the time  of the transaction are  not materially different
         from the facts on which the PLR was based,

o        there has been no change in the applicable law,

o        the PLR was originally issued for a proposed transaction and

o        the  taxpayer  directly  involved  in the PLR  acted  in good  faith in
         relying on the PLR, and revoking the PLR retroactively  would be to the
         taxpayer's detriment.

         Covol  received  its PLR in  September  1995.  At least six other  PLRs
covering  twelve of the synthetic  fuel  facilities  have been obtained by third
parties in  connection  with  licenses  of Covol's  synthetic  fuel  technology.
However,  all  PLRs are only  binding  with  respect  to the  specific  projects
addressed  in the PLR and may only be relied on by the party  that has  obtained
the PLR.  The  Section  29 credit is subject to the  passive  activity  rules of
Section 469, and therefore may not be available to individuals  and closely held
corporations.

         The Section 29 credit is equal to  approximately  $6.10 in 1997 dollars
for each oil barrel  equivalent of the qualifying  fuel produced and sold.  This
equates to  approximately  $20.00-$28.00  per ton of synthetic fuel  briquettes,
depending  upon the  recoverable  heat  content.  The oil barrel  equivalent  is
defined  generally as an amount of fuel having a recoverable heat content of 5.8
million  Btu's.  The  Section 29 credit  allowed  may not exceed the  taxpayer's
regular tax  liability  reduced by certain other  credits.  The credit cannot be
utilized to offset the Alternative Minimum Tax.

         The Section 29 credit was designed to provide protection for qualifying
fuels against market price declines,  and it is therefore subject to a phase out
after the  unregulated  oil price  reaches  specified  levels  under an annually
adjusted  formula.  In 1997  dollars,  the credit  would have phased out had the
reference  price for oil exceeded  $47.78 per barrel,  but the  reference  price
determined for 1997 was $18.92 and no phase out occurred.  There presently is no
reference  price for 1998.  However,  the average  price of oil in the U.S.  was
lower in 1998 than 1997.  The credit is also subject to reduction  insofar as an
otherwise  qualifying  facility  benefits  from grants or  subsidized  financing
provided  by  federal,  state  or local  governments,  or from  tax-exempt  bond
financing.

                                       8
<PAGE>

         Section 29 of the tax code  contains  no  provision  for  carryback  or
carryforward of Section 29 credits.  Once earned, the credits are not subject to
subsequent  recapture.  By virtue of the various  limitations  and other factors
described  above,  there  can be no  assurances  that any  particular  amount of
Section 29 credit will be allowable and usable.

         During 1996,  certain of the time periods  applicable to the Section 29
credit  were  extended.  The  Section 29 credit  will,  under  present  law,  be
available for sales of qualified  fuels  completed  before  January 1, 2008. The
qualified  fuels sold must be produced at  facilities  placed in service by June
30, 1998. The synthetic fuel facilities must have been constructed pursuant to a
binding written contract in effect as of December 31, 1996.

Synthetic Fuel Manufacturing Facilities

         The  following  table  represents  a summary of the 24  synthetic  fuel
manufacturing  facilities  constructed  and placed in operation  before June 30,
1998 by Covol and its licensees.
<TABLE>
<CAPTION>

                                               SYNTHETIC FUEL MANUFACTURING FACILITIES


                         No. of                                                                                Annual Rated
  Name of Facility       Plants1    Location           Owner/Licensee2          Operator                      Capacity (tons)3
  ----------------       -------    --------           ---------------          --------                      ----------------
<S>                       <C>      <C>                 <C>                      <C>                              <C>    
Utah Synfuel #1             1      Price, Utah          Coaltech No. 1          Company                            360,000
                                                        L.P.4
Carbon Synfuel              1      Price, Utah          Company5                Company                            360,000
Mohave Synfuels             1      Laughlin,            Savage Industries       Flyash Haulers,                    280,000
                                   Nevada               Inc.                    Inc.
Birmingport                 1      Mulga,               Birmingham Syn          Birmingham Syn                     360,000
                                   Alabama              Fuel, L.L.C.7           Fuel, L.L.C.
Brookwood                   1      Brookwood,           PacifiCorp Syn          PacifiCorp Syn                     360,000
                                   Alabama              Fuel, L.L.C8            Fuel, L.L.C.
Pumpkin Center              2      Flat Creek,          PacifiCorp Syn          PacifiCorp Syn                     720,000
 #1 & #2                           Alabama              Fuel, L.L.C.            Fuel, L.L.C.
Norton                      1      Norton,              PC Virginia             Constellation                      600,000
                                   Virginia             Synthetic Fuel #1,
                                                        L.L.C.
Chelyan                     1      Chelyan, West        PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #1,
                                                        L.L.C.
Muddlety                    1      Muddlety, West       PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #2,
                                                        L.L.C.
Eckman                      1      Eckman, West         PC West Virginia        Constellation                      600,000
                                   Virginia             Synthetic Fuel #3,
                                                        L.L.C.
Appalachian                 2      Peccus, West         Appalachian             AT Massey                          720,000
 Synfuel                           Virginia             Synfuel, L.L.C.
Mountaineer                 1      Tallmansville,       Company6                Savage                             360,000
 Synfuel                           West Virginia                                Industries Inc.
Pocahontas                  1      North Fork,          Company                 Company                            360,000
 Synfuel                           West Virginia


                                       9
<PAGE>

Ginger Hill                 1      Ginger Hill,         Ginger Hill             Maple Creek                        300,000
                                   Pennsylvania         Synfuels, L.L.C.        Mining
Robena                      1      Paisley,             Robena, L.L.C.          Consolidation                      580,000
                                   Pennsylvania                                 Coal
Commonwealth                1      Karthaus,            Company                 River Hill Coal                    360,000
 Synfuel                           Pennsylvania
Pennsylvania                1      Somerset,            Somerset Fuels,         Somerset Fuels,                    600,000
 Synfuel Project                   Pennsylvania         L.L.C.                  L.L.C.
USA Coal, #1,               4      Pawnee, Illinois     A.J.G. Financial        USA Coal                         1,440,000
#2, #3, & #4                                            Services, Inc.
Pleasant Ridge              1      Alledonia, Ohio      Pleasant Ridge          Ohio Valley                        340,000
                           ---                                                                                  ----------
                                                        Synfuels, L.L.C.        Coal
Total                      24                                                                                    9,900,000
                          ====                                                                                   =========
</TABLE>


1    A plant is a finished  synthetic fuel  manufacturing  facility  constructed
     pursuant  to a binding  construction  agreement  entered  into on or before
     December 31, 1996.

2    Most  owners/licensees are special purpose  entities owned by  one or  more
     other companies.

3    This is an amount as engineered and determined by equipment  manufacturers.
     Most  facilities  are not yet  operating  at  rated  capacity.  There is no
     assurance that the facilities will operate at rated capacity in the future.

4    Coaltech  No.  1  L.P.  consists  of  AJG  Financial   Services,   Inc.,  a
     wholly-owned subsidiary of Arthur J. Gallagher & Co., and Square D Company,
     a wholly-owned  subsidiary of Groupe Schneider,  as limited  partners,  and
     Covol as 1% general partner.  Covol has entered into an operating agreement
     with Coaltech to operate the Utah Synfuel #1 facility.

5    Covol granted  Coaltech an option  to purchase the  facility, but  does not
     expect the option to be exercised.

6    Covol  granted  Mountaineer  Synfuel,  L.L.C.  an  option to  purchase  the
     facility,  which  option  expires  in January  1999.  The  purchase  option
     transaction  for  the  Mountaineer  facility  provides  that  Covol  is the
     managing member of Mountaineer Synfuel, L.L.C.

7    Birmingham  Syn  Fuel, L.L.C.  is  an  affiliate  of  PacifiCorp  Financial
     Services, Inc.

8    PacifiCorp  Syn  Fuel, L.L.C.  is  an  affiliate  of  PacifiCorp  Financial
     Services, Inc.


     Covol Contracts.  Consistent with the requirements for obtaining Section 29
tax  credits,   in  December  1996  Covol  entered  into  fourteen   design  and
construction  agreements for the design and  construction  of new synthetic fuel
manufacturing  facilities each having capacity of approximately 360,000 tons per
year.  Depending  upon the specific  agreement,  the  contractor was either TIC,
CEntry Constructors & Engineers,  PICOR or Centerline  Engineering  Corporation.
The PICOR  contracts  were part of a joint venture with Savage  Industries.  The
construction agreements,  among other things, required that the plants be placed
in service no later than June 30, 1998.

     Covol obtained financing and successfully  constructed five facilities from
its construction  agreements.  Of these, one was built by TIC for Covol and sold
to Birmingham  Syn Fuel,  L.L.C.,  a special  purpose entity owned by PacifiCorp
Financial  Services,  Inc., two were built for Covol by Centerline and are under
option for sale to Mountaineer  Synfuel,  L.L.C. and to Coaltech No. 1 L.P., and
two were built by TIC and are held for sale by Covol.

                                       10
<PAGE>


     Covol  assigned four other  construction  agreements to licensees and those
licensees successfully constructed four facilities as follows:

     Fluor  Corporation.   Covol  assigned  two  of  its  fourteen  construction
agreements to Appalachian  Synfuel  L.L.C.,  a wholly owned  subsidiary of Fluor
Corporation.  The  facilities  were built at A.T.  Massey Coal  Company,  Inc.'s
Marfork  Prep  Plant  Site near  Peccus,  in Boone  County,  West  Virginia.  In
conjunction  with the  assignment  of the two  contracts,  Covol  entered into a
license agreement with Appalachian for the use of the Covol binder technologies.
Under the agreement,  Covol was paid an advance license fee. A quarterly license
fee is also to be paid based upon the Btu of product  produced  and sold up to a
prescribed  amount of production per year.  Covol also granted  Appalachian  the
right to pay a lump sum payment for the facilities, in lieu of quarterly license
fees over the term of the  agreement.  Covol will provide binder to the facility
on a cost plus basis.

     Pelletco  Corporation.  Covol assigned two of its  construction  agreements
with Centerline to affiliates of Pelletco Corporation. One contract was assigned
to Pleasant Ridge Synfuels,  L.L.C.  which  constructed a facility in Alledonia,
Ohio.  One  contract  was  assigned  to  Ginger  Hill  Synfuels,   L.L.C.  which
constructed a facility at Ginger Hill,  Pennsylvania.  In connection  with these
two facilities,  Covol entered into technology  license and agreements to supply
Covol's  chemical  binder,  providing  Covol  with  advanced  license  fees  and
quarterly  license fees equal to 50% of the licensees' net cash flow. Covol will
provide binder to the two facilities on a cost plus basis.

     Unused Contracts. Covol did not build facilities under five of its fourteen
construction  agreements,  including the two PICOR  contracts as part of a joint
venture  with  Savage  Industries.  The  construction  agreements  provided  for
penalties  if the  construction  was not pursued by Covol.  Covol  accrued  this
liability  during  the  fiscal  year  ended  September  30,  1997,  of which the
remaining  liability at  September  30, 1998 is $755,000.  Covol  believes  that
construction under any of the five unused contracts is not likely.

     Additional  Licensed  Facilities.   In  addition  to  the  nine  facilities
constructed under Covol's construction agreements, Covol licensed its technology
to eight licensees for use at fifteen facilities constructed by these licensees.

     In total,  Covol has licensed or constructed  plants using the Covol binder
technologies at 24 synthetic fuel facilities that operate at 18 locations in the
Rocky  Mountain  region,  Southern  Appalachia,  Central  Appalachia,  Northeast
Appalachia,  Northwest Appalachia, and the Illinois Basin, which are the primary
coal supply regions of the United States.

     A facility  generally  consists of a  conditioner  and binder  additive and
mixing system,  briquetting or aggregating equipment, a product dryer, and other
supporting  systems.  However,  each facility was  individually  engineered  and
constructed,   including  systems  and  components  specially  selected  by  the
respective  owners,  so that there is  variation  in features  from  facility to
facility.  Covol has manufactured and sold binder mixing plants for installation
at synthetic fuel  manufacturing  facilities.  Six such plants were manufactured
and sold in 1998.

     License and Binder  Supply  Agreements.  All  non-Covol  entities that have
constructed or own facilities using the Covol binder  technologies  have entered
into a technology  license and binder supply agreement with Covol.  Most license
agreements  provide  for an  advance  license  fee of  $1.39  per  ton of  rated
capacity,  payable upon reaching project milestones.  Covol has received most of
the advance license fees related to these facilities.  In addition,  pursuant to
the license  agreement,  the licensee pays a quarterly  earned  license fee at a
prescribed dollar amount multiplied by the recoverable heat denominated in Btu's
in the product  produced and sold during the calendar  quarter.  The  prescribed
dollar  amount is subject to  adjustment  based upon the  "inflation  adjustment
factor" as set forth in Section 29 of the tax code. In some cases, the amount to
be paid is subject to adjustment to the extent that licensees incur an operating
loss on the  production  and sale of  synthetic  fuel,  exclusive  of the amount
licensees  pay as a  license  fee for the use of the  technology.  Some  license
agreements  also provide for a goal fee based on time  schedules and  production
amounts. The license agreements generally have a term until the later of January
1, 2008 or the corresponding  date after which tax credits may not be claimed or
are not otherwise available under Section 29 of the tax code.

                                       11
<PAGE>

     Covol also agreed,  pursuant to the binder  supply  agreements,  to provide
binder  material to licensees for the  manufacture  and  production of synthetic
fuel. The price for the binder sold to the licensees falls into two categories:

o    a fixed price, or

o    an amount equal to Covol's cost plus a prescribed mark-up.

     In some cases, the mark-up may be reduced to the extent the licensee incurs
a loss on the production and sale of synthetic  fuel, but not below Covol's cost
for such binder materials.  The binder is currently manufactured by Dow Chemical
Corporation for Covol  utilizing  Covol's  patented and proprietary  technology.
Covol arranges with Dow for shipping of the binder directly to the facilities.

     Pace Loan. In December of 1996 Covol entered into license  agreements  with
affiliates of Pace Carbon Fuels, L.L.C. (collectively "Pace") for the use of the
Covol binder technologies at four synthetic fuel manufacturing  facilities owned
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 license fees. This
reduction was accomplished by a ten year loan agreement whereby Covol would loan
to Pace up to $750,000 each quarter beginning in November 1998.  Covol's loan to
Pace will be repaid at the end of the ten years only if the Pace  projects  have
accumulated  sufficient  prescribed  earnings.  Pace  has  requested  a loan  of
$750,000 for the November  1998  quarter.  Covol  believes that its current loan
obligation  to Pace is limited to the earned  license  fees payable to Covol for
the quarter  ended  September  30, 1998,  which is believed to be  approximately
$300,000.  Pace and  Covol  are  negotiating  in an  attempt  to  resolve  their
differences.

Covol Synthetic Fuel Facility Operations

     Covol is the operator at three facilities: Utah Synfuel #1, Carbon Synfuel,
and Pocahontas  Synfuel.  Of these  facilities,  Utah Synfuel #1 is not owned by
Covol, and Covol operates the facility under agreement with the owner, Coaltech.
The operating agreement provides that Covol will act as operator of the facility
for a quarterly  fee based upon the amount of synthetic  fuel  produced and sold
per year. Covol cannot predict with any certainty the amount of fees that may be
generated under its operating agreement.

     Covol  has  contracts  with   independent   operators  to  operate  Covol's
Commonwealth Synfuel and Mountaineer Synfuel facilities. River Hill Coal Company
operates the  Commonwealth  facility  and Savage  Industries  Inc.  operates the
Mountaineer  facility.  Both operating contracts  compensate the operator with a
prescribed fee plus reimbursement of costs.

Supply of Raw Materials

     The synthetic fuel  manufacturing  facilities use coal fines as the primary
feedstock  to produce  synthetic  fuel.  Accordingly,  a supply of coal fines is
essential to the feasibility of a synthetic fuel manufacturing facility.

     Historically,  lower quality coal and mining  refuse and fine  particles of
coal were discarded into refuse piles or impoundments.  Today,  coal preparation
and  material  handling  technologies  have  reduced  the amount of coal that is
discarded,  but coal fines  generated by coal mining and  preparation  are still
problematic for the industry.  With some variation,  most consumers of coal only
purchase  coal with an ash  content  of 12% or less.  Discarded  coal  fines are
typically  too  high  in ash  content  to be used  as-is  in  making  marketable
synthetic fuel. To make use of fine coal refuse, owners of synthetic fuel plants
must either  blend the refuse with "clean" coal in  appropriate  proportions  to
yield an acceptable ash content, and/or clean the coal refuse itself. Clean coal
can be  purchased  from  traditional  coal  marketers  and is  available  to all
synthetic  fuel  facility  owners that have a clean  coal/coal  refuse  blending
strategy. Covol's strategy at all of the facilities it owns or operates includes
clean coal/coal refuse blending.

      Coal  fines  cleaning  is  a  distinct  technology  and  to  implement  it
successfully  requires  analysis  of the  particular  coal  refuse to  determine
appropriate  plant design and to determine whether feedstock can be economically
produced.  Capital requirements for coal cleaning or preparation plants adequate
to supply a synthetic fuel plant can

                                       12
<PAGE>

be in excess of $4 million.  Coal cleaning  plants require six months or more to
design and  construct.  A  feasibility  analysis  must be performed to determine
whether  the  savings  achieved  by the  plant  justify  the  capital  costs  of
construction   together  with   operational   costs,   which  can  vary  between
approximately  $5-10 per ton. The costs of a cleaning  plant are compared to the
alternative of purchasing  clean coal for blending.  The decision to construct a
coal cleaning  plant does not delay delivery of synthetic fuel to market because
in all cases clean  blending  coal is  available  to  purchase  as an  immediate
alternative.  The decision to construct a coal cleaning  plant is based on how a
facility most  economically  obtains clean feedstock.  Covol  constructed a coal
cleaning plant to supply Utah Synfuel #1 and Carbon Synfuel and is reviewing the
feasibility of coal cleaning plants at two other synthetic fuel facilities.

     In facilities owned and operated by licensees, the licensee secures its own
supply of coal fines.  Licensees that are also coal producers  utilize their own
feedstock sources. Nonproducer licensees secure deposits of coal fines to supply
their  facilities.  Covol has  arranged  for the  supply  of coal  fines for the
following facilities it owns or operates:

     Utah Synfuel #1 and Carbon Synfuel.  In February 1997, Covol entered into a
contract  with a  non-affiliated  party,  Earthco,  to acquire coal fines and to
lease  property  to conduct  fines  recovery  and  preparation  activities  at a
location near Wellington,  Utah,  approximately  six miles from the Utah Synfuel
plant site.  Covol paid an initial amount to Earthco upon execution of the lease
agreement to acquire the fines and lease the  associated  land and will continue
to make quarterly  payments  through May 2000.  Covol  constructed a preparation
plant at the site  which  became  operational  in May  1998 and  which  produces
feedstock from the acquired raw fines for the Utah Synfuel #1 and Carbon Synfuel
facilities.  The estimated quantity of coal fines at this site is in excess of 2
million tons although the recoverable amount may be less.  Additional fines will
be required to supply the longer term requirements of Utah Synfuel #1 and Carbon
Synfuel.

     Pocahontas  Synfuel.  In May 1997,  Covol entered into a joint venture with
Black Diamond Enterprises,  Inc. under which Black Diamond has certain rights to
market the  synthetic  fuel  produced at the facility and to a percentage of the
net proceeds received by Covol from the project.  In addition,  Black Diamond is
to provide coal fines to the Pocahontas Synfuel facility. Black Diamond owns the
land in McDowell  County,  West Virginia upon which the  Pocahontas  facility is
located and which land includes a fines pond and other coal refuse containing an
estimated 1.2 million tons of recoverable  clean fines.  Black Diamond and Covol
plan to construct a preparation  plant to clean the raw Black Diamond fines.  To
date,  neither Covol nor Black Diamond have begun  construction of a preparation
plant.  In addition to the fines at the  Pocahontas  site, an affiliate of Black
Diamond operates a waste coal recovery  operation with an estimated 350,000 tons
of  recoverable  clean fines.  Covol has also acquired waste coal on a site near
the project with an estimated  500,000 tons of  recoverable  clean fines.  After
cleaning,  the coal fines from these reserves are high in recoverable  heat, low
in ash, and low in sulfur. Until a preparation plant can be permitted,  financed
and constructed at Pocahontas, Covol is purchasing coal fines from local sources
for processing at the facility.

     Commonwealth.  The  Commonwealth  Synfuel  facility  is located on property
owned by River Hill Coal Company,  Inc. River Hill has  approximately  6 million
tons of leased and permitted coal reserves which it actively  mines.  River Hill
has agreed to provide up to 400,000  tons per year of coal fines from its mining
and preparation plant operations to the Commonwealth facility.  Covol intends to
assign this supply agreement to the entity that acquires this facility, which is
currently being offered for sale.

     Mountaineer.  The Mountaineer Synfuel facility is located on property owned
by Upshur Property,  Inc., an affiliate of Anker Energy  Corporation.  Anker has
agreed to provide the feedstock  requirements of Mountaineer Synfuel, L.C. for a
period of ten years, up to 480,000 tons of feedstock per year. Anker will supply
the feedstock  from various  sources  owned or  controlled  by Anker,  including
preparation plant operations and fines ponds. The price for the feedstock varies
based  upon the  source of the coal  fines and the costs of  recovery.  The site
contains a fines refuse pond which is serving as a partial  source for feedstock
and a  preparation  plant is  planned  to  increase  the  quality  and amount of
feedstock  coming from the site refuse pond.  Covol does not yet have  financing
for the preparation plant. If Mountaineer Synfuel,  L.L.C.  exercises its option
to  purchase  the  Mountaineer  facility,  Covol  proposes to assign this supply
agreement to Mountaineer.

                                       13
<PAGE>

     Alabama Inventory.  In March of 1997 Covol entered into a coal fines supply
agreement (the Supply  Agreement")  with K-Lee  Processing Inc. and Concord Coal
Recovery Limited Partnership  (collectively "K-Lee"). Covol purchased coal fines
under the Supply Agreement through February of 1998 at which time Covol sold its
inventory  of coal fines and assigned the Supply  Agreement  to  Birmingham  Syn
Fuel,  L.L.C.  Birmingham Syn Fuel removed the coal fines inventory and asserted
that the  inventory was  approximately  11,000 tons less than K-Lee had invoiced
and received payment from Covol.  Covol is currently in negotiations  attempting
to resolve the dispute.

     Supply of Binder.  Covol purchases its patented and proprietary binder from
Dow  Chemical  Company  under a ten year  agreement  under  which  Covol  pays a
prescribed  price per pound of binder.  Covol arranges with Dow for the delivery
of the binder  from Dow's  manufacturing  plants to each of the  synthetic  fuel
facilities owned, operated, or licensed by Covol.

Sale of Facilities

     Covol and its affiliates  have developed and sold or have granted an option
to sell four  synthetic  fuel  facilities.  The  following  is a summary of each
option or sale:

     Utah  Synfuel  #1. On March 10,  1997,  Utah  Synfuel  #1 Ltd.,  a Delaware
limited  partnership  in which  Covol was at the time a 64%  owner  and  general
partner,  sold the Utah synthetic fuel facility for $3.5 million, in the form of
a nonrecourse  promissory note bearing interest at 9.6552% per annum and payable
in 44 equal  quarterly  installments,  all in  accordance  with the Utah Project
Purchase  Agreement,  dated as of March 7, 1997,  between Covol, Utah Synfuel #1
and  Coaltech  No. 1 L.P.  The sale of the Utah  facility  resulted in a loss of
approximately $581,000 to Utah Synfuel #1. The promissory note is collateralized
by a security interest in the Utah facility, and in the event of a default under
the  promissory  note,  Covol's and Utah  Synfuel #1's sole right to recovery is
limited to the Utah facility without recourse against Coaltech.

     Covol  granted  Coaltech a put option to require Covol to purchase the Utah
facility from Coaltech if:

     1.       all of the Coaltech limited  partners are  unable to  utilize  the
              federal income tax credits under Section 29 of the tax code,

     2.       the economic  benefits  accruing to or  experienced  by all of the
              Coaltech  limited  partners  differ  significantly  from  what was
              initially projected, or

     3.       there  is  a   permanent  force  majeure  or  material  damage  or
              destruction of the Utah facility.

     If the put option is exercised prior to the third  anniversary  date of the
facility  sale,  the option  price will be equal to the fair market value of the
limited partnership  interests of the optionees on a going concern basis, but in
no event will the option price exceed 50% of the capital  contributions  made by
the optionees to fund payments due under the  promissory  note, the Utah License
Agreement  and broker fees. If the put option is exercised on or after the third
anniversary  date,  the option price will be $10 and the  optionees  will not be
entitled to any other payments.

     As part of the sale of the Utah facility, Covol and Utah Synfuel #1 entered
into a Supply and Purchase Agreement with Coaltech.  Under the agreement,  Covol
agreed to provide coal fines to the Utah facility for processing  into synthetic
fuel at an amount equal to Covol's per ton costs, including any wash costs. Utah
Synfuel #1 also agreed to purchase from Coaltech the synthetic  fuel produced at
Coaltech's  cost plus one dollar per ton.  Coaltech  has the right to market its
synthetic  fuel to a third  party,  with Utah Synfuel #1 having a right of first
refusal to purchase such synthetic fuel.  Covol has incurred a loss each quarter
in  connection  with this  agreement and expects that these losses will continue
into the foreseeable future.

     Carbon  Synfuel.  In connection with the Utah Project  Purchase  Agreement,
dated March 10, 1997 Covol  entered into an option  agreement  with  Coaltech to
sell a second  facility,  identified  as Carbon  Synfuel and located at the Utah
Synfuel #1  facility.  If Coaltech  exercises  its  option,  Covol will sell the
second line of synthetic fuel  manufacturing  equipment  including the building,
binder plant, and other equipment that were not part of the Utah

                                       14
<PAGE>

Synfuel #1 facility  sale.  The terms of the option  provide that Coaltech would
purchase Carbon Synfuel on the same terms as Coaltech's purchase of Utah Synfuel
#1 facility. Covol does not expect the option to be exercised. Covol is actively
seeking an alternative buyer for the Carbon Synfuel  facility,  however there is
no assurance that a sale will be completed.

     Since the Utah Synfuel #1 facility and Carbon  Synfuel  facility were first
placed in service they have experienced several problems,  including  inadequate
clean coal fines as feedstock, inadequate end product strength, and inability to
market to end-consumers  the synthetic fuel product produced from the feedstock.
Covol  continues to improve the synthetic fuel product quality and believes that
the improvements  will achieve the results  necessary for successful  marketing.
Covol also has begun to see some success in marketing the product from these two
facilities to a power plant and an industrial  manufacturer.  Covol is seeking a
long term purchase commitment from these consumers.

     The Utah Synfuel #1 and Carbon Synfuel facility are currently  operating at
well below their rated capacity.  Covol and its licensee have incurred a loss on
the  production  of  synthetic  fuel at the Utah  Synfuel #1 and Carbon  Synfuel
facilities.

         In order to provide coal fines to the Utah  Synfuel #1 facility,  Covol
entered into a purchase agreement with Earthco to acquire the coal fines located
at Wellington,  Utah. The estimated  amount of coal fines at the Wellington site
is in excess of 2 million tons. The Wellington fines require washing.  Covol has
constructed  a wash plant at the  Wellington  site which  supplies coal fines to
Utah Synfuel #1 and Carbon Synfuel.  The cost for the plant was approximately $8
million.  The financing for the  construction  of the wash plant was provided in
part by AJG Financial  Services,  Inc., and is evidenced by a debenture of Covol
to AJG which is  collateralized  by the wash plant assets.  The debenture  bears
interest at 6% per annum with  principal  and interest  being due and payable in
October 1999. As additional  consideration  to AJG for financing the wash plant,
Covol,   in  October  1997,   agreed  to  grant  to  AJG  warrants  to  purchase
approximately  430,000  shares of Covol common stock,  with fifty percent of the
shares having a purchase  price of $10 per share and fifty percent of the shares
having a purchase  price of $20 per share.  The  warrants  expire two years from
issuance.

     Birmingham  Syn  Fuel.   Alabama  Synfuel  #1  Ltd.,  a  Delaware   limited
partnership in which Covol was at the time a 74% owner and general partner, sold
the Birmingham Syn  Fuel/Birmingport  facility to Birmingham Syn Fuel, L.L.C., a
wholly-owned  subsidiary of  PacifiCorp  Financial  Services,  Inc., on March 6,
1998. The purchase price for the Birmingport  facility was $6,500,000 payable in
the form of a nonrecourse  promissory note collateralized by certain portions of
the Birmingport facility.

     Mountaineer Synfuel. On May 5, 1998 Covol entered into a purchase agreement
to sell the Mountaineer synthetic fuel facility to Mountaineer Synfuel,  L.L.C.,
a Delaware  limited  liability  company.  The  agreement  is subject to numerous
conditions,  including  but not limited to, the obtaining of a PLR from the IRS,
and the  production  of  product  meeting  certain  specifications.  There is no
assurance that Mountaineer will exercise its option with respect to the purchase
of this facility. Covol also entered into a financing agreement with Mountaineer
to finance up to $9.75 million for project  construction and operations  working
capital.  Covol's  obligation to repay the  financing  will be  extinguished  if
Mountaineer exercises its purchase option; otherwise,  Covol will be required to
repay the loan with ten  percent  interest in monthly  installments  of interest
only payments for the months January through June 1999 and monthly  installments
thereafter  of  $350,000  and a  balloon  payment  on  June  30,  2000.  Covol's
obligation to repay the amounts borrowed is  collateralized by the assets of the
project,  and income streams from the Ginger Hill and Pleasant Ridge facilities.
Under  a  license  agreement,  Covol  will  provide  use of its  technology  and
Mountaineer  will pay a  quarterly  license  fee based upon the  synthetic  fuel
product  produced  and sold during the  quarter.  Covol will also supply  binder
material to the project on a cost plus basis.

     In addition to the four facilities discussed above, Covol owns and operates
two  synthetic  fuel  manufacturing  facilities  that  Covol has for  sale.  One
facility  is  referred  to  as  Commonwealth  Synfuel,  located  near  Karthaus,
Pennsylvania.  The  other  Covol-owned  facility  for  sale  is  referred  to as
Pocahontas Synfuel located near North Fork, West Virginia. Several entities have
expressed interest in purchasing the facilities and Covol expects the facilities
to be sold in early 1999.  However,  Covol  cannot give  assurance  that it will
successfully sell either or both facilities.

                                       15
<PAGE>

Research and Development

     Covol has devoted and  continues  to commit  significant  human and capital
resources to the  development,  refinement  and  commercialization  of the Covol
binder technologies in the engineered fuel and engineered resource applications.
Covol is currently focusing its research and development  efforts principally on
the synthetic fuel technology, including refinements to the chemical formula and
process, enhancements to the base binder formulations to address product quality
issues,  and continued testing and development of other binder materials for the
production of synthetic fuel.  Covol is also currently  conducting  research and
development  related to  application  of the Covol binder  technologies  to iron
tailing  materials,  coke  breeze,  silicon  carbide and other waste  product or
resource materials.

     Covol's  intellectual  property  base  consists  of  seven  U.S.  and  four
international  patents  relating to the Covol binder  technologies as applied to
coal, iron tailings, coke and other carbon based materials. Covol's research and
development  efforts will be directed  toward  perfecting  and  expanding  these
technologies  and the filing for patents  for  proprietary  intangible  property
developed.  See "ITEM 1. BUSINESS - Proprietary  Protection" for a discussion of
Covol's patents, trademarks and other intellectual property.

Proprietary Protection

     Covol has the following trade names and patents covering certain aspects of
Covol's technology:

     Trade names:

     Covol  Technologies,  Inc.,  Alabama Synfuel #1 Ltd., Utah Synfuel #1 Ltd.,
     Flat Ridge Corporation and Engineered Fuel Technologies, Inc.

              Trademarks and Service Marks:

              United States Trademark  Registration No. 2,038,742 for  licensing
     services   identified   by  "Covol",   "Recycling  Yesterday's  Waste  Into
     Tomorrow's Resources."

     United States Patents:

         United States Patent No. 5,453,103, which issued 26 September 1995.

         United States Patent No. 5,487,764, which issued 30 January 1996.

         United States Patent No. 5,589,118, which issued 31 December 1996.

         United States Patent No. 5,599,361, which issued 4 February 1997.

         United States Patent No. 5,738,694, which issued 14 April 1998.

         United States Patent No. 5,752,993, which issued 19 May 1998.

         United States Patent No. 5,807,420, which issued 15 September 1998.

     Foreign Patents:

         European Patent Office # 96905442.8-2307 filed May 1, 1998.

         Australian  #686624 filed on January 21, 1994;  filed with U.S.  Patent
Office as No. 184099 on May 28, 1998.

         New  Zealand  #266060  filed on April 7, 1994;  filed with U.S.  Patent
Office on February 20, 1998.

         Republic  of  Trinidad  and  Tobago  #960038  filed on July 1, 1996 and
#970147 filed under PCT/US96/01798 on February 8, 1996.

         Other United  States,  Patent  Cooperative  Treaty,  and Foreign Patent
Applications are pending.

                                       16
<PAGE>

     Covol's U.S. and foreign  patents expire on January 21, 2014.  There can be
no assurance as to the scope of protection afforded by the patents. In addition,
there are other  industrial  waste recycling  technologies in use and others may
subsequently be developed,  which do not, or will not utilize  processes covered
by the patents or pending  patents.  There can be no  assurance  that any patent
issued will not be infringed or challenged by other parties, infringe on patents
held by other  parties  or that  Covol will have the  resources  to enforce  any
proprietary  protection afforded by the patent or defend against an infringement
claim.

     In  addition  to patent  protection,  Covol also  relies on trade  secrets,
know-how   and   confidentiality   agreements   to  protect  the  Covol   binder
technologies. However, such methods may not afford complete protection and there
can be no assurance that others will not independently  develop such know-how or
obtain access to Covol's know-how, concepts, ideas, and documentation.

     Since Covol's proprietary information is important to its business, failure
to protect ownership of its proprietary information would likely have a material
adverse  effect on Covol.  Covol's  current and expected  revenues are dependent
upon license agreements by which licensees use the Covol binder  technologies to
manufacture  synthetic  fuel and then pay license fees to Covol.  Covol  expects
that  revenues will  continue to be tied to future  licensing  agreements in the
application  of Covol binder  technologies  to iron rich wastes,  coke dust, and
other  potentially  useful  wastes  and  by-products.  Covol  believes  that its
patents, trade secrets, know-how and confidential information are the basis upon
which Covol is able to obtain licensing agreements.

Confidentiality Provisions

     As part of its business,  Covol typically enters into agreements concerning
its projects which contain  confidentiality  provisions.  Covol is, on occasion,
required to disclose such  agreements to the Securities and Exchange  Commission
as part of its ongoing reporting  requirements under the Securities Exchange Act
of  1934.  In  addition,  disclosure  of  such  agreements  may be  required  in
connection with Covol's private placement of securities.  Some of the agreements
do not contain the standard  exceptions for the disclosure of information  which
is required to be disclosed under law. Consequently,  no assurances can be given
that Covol has not  inadvertently  disclosed  information  regarding its various
projects in violation of confidentiality covenants entered into by Covol.

Government Regulation

     Covol's  and its  licensees'  synthetic  fuel  operations  are  subject  to
federal,  state and local  environmental  regulations that impose limitations on
the discharge of pollutants  into the air and water and establish  standards for
the treatment, storage and disposal of waste products. In order to establish and
operate the  synthetic  fuel plants,  Covol and its licensees  obtained  various
state and local  permits.  Covol believes that it or its licensees have obtained
all required  permits to construct and operate  synthetic fuel  facilities,  and
that they are in substantial  compliance  with all relevant laws and regulations
governing the synthetic  fuel  operations.  However,  Covol's and its licensees'
synthetic fuel operations  entail risk of environmental  damage and Covol or its
licensees  may incur  liabilities  in the future  arising from the  discharge of
pollutants into the environment or from waste disposal practices.

     Failure by Covol or its licensees to maintain  necessary permits to operate
synthetic  fuel  plants  and to comply  with  permit  requirements  could have a
material adverse effect on Covol or its licensees.  Other developments,  such as
the  enactment  of more  stringent  environmental  laws and  regulations,  could
require Covol or its licensees to incur  significant  capital  expenditures.  If
Covol or its  licensees  do not have the  financial  resources  or is  otherwise
unable to comply with such laws and regulations,  such failure could also have a
material adverse effect on Covol.

     Covol's goal is to establish  itself as the provider of  technologies  that
will  assist  others in the  processing  and  reclamation  of their  wastes  and
by-products,  and Covol  seeks for itself and its  licensees  to avoid  creating
waste streams or compounding  environmental  reclamation problems. Covol has not
assumed responsibility for environmental reclamation of coal refuse impoundments
from which Covol or its licensees obtain refuse for feedstock.  Such liabilities
are and remain the responsibility of the impoundment owners or operators. In the
manufacture   of  synthetic   fuel  from  coal  refuse  using   Covol's   binder
technologies,  the synthetic fuel produced  effectively  completely consumes the
refuse.  The  synthetic  fuel  manufacturing  process  does  not  contribute  to
environmental  reclamation liabilities with respect to the coal refuse. However,
the  synthetic  fuel  manufacturing  process  using  Covol  binder  technologies
typically uses dilute acids.  Covol and its licensees must comply with hazardous
material handling and storage  regulations  related to acid solutions and stored
concentrates.

     Covol's and its licensees'  synthetic  fuel  operations are also subject to
federal and state safety and health  standards.  Covol is committed to providing
effective management of worker safety and health protection.  Covol periodically
contracts with independent  safety and industrial hygiene inspectors in order to
measure a facility's regulatory compliance.  In addition,  Covol has developed a
safety policy designed to raise and maintain a high level of safety awareness by
both  management  and  employees.  Compliance  to  applicable  safety and health
standards is verified  through  periodic  inspections  by  regulatory  agencies.
Failure to comply with safety and health standards could have a material adverse
affect on Covol, for example,  a regulatory  inspector could close the operation
until Covol meets the required standards.

                                       17
<PAGE>

Competition

     Products  made  using the Covol  binder  technologies  compete  with  other
synthetic products as well as traditional source materials.  Competitive factors
include  price,  quality,  delivery  cost and waste  handling  costs.  Covol may
experience  competition  from other  alternative  fuel technology  companies and
their licensees,  particularly those companies with technologies to produce coal
based solid synthetic  fuels.  Competition may come in the form of the licensing
of the competing  technologies  to process coal fines or in the marketing of end
products  qualifying  as  synthetic  fuel.  Competition  includes,  for example,
Carbontec,  Krystal Bond, KFx Inc. and Startec Inc.  Covol will also  experience
competition  from  traditional  coal and fuel  suppliers  and  natural  resource
producers in addition to those  companies  that  specialize  in the disposal and
recycling of waste products  generated by coal,  coke,  steel and other resource
production. Many of these companies have greater financial, management and other
resources than Covol. Covol believes that it will be able to compete effectively
although there can be no assurance that it will do so successfully.

Employees

     Covol currently employs  approximately 80 persons full-time.  Approximately
30  of  such  persons  are  in  corporate   administration  including  research,
development  and  marketing,  and 50 are in  synthetic  fuel  and  coal  washing
operations.  None of these  employees  are  covered by a  collective  bargaining
agreement.

Forward Looking Statements

     Statements regarding Covol's expectations as to the financing, development,
construction   and   operation  of   facilities   utilizing   the  Covol  binder
technologies, the marketing of products, the receipt of licensing fees and other
information  presented  in this  Annual  Report on Form 10-K that are not purely
historical  by nature,  including  those  statements  regarding  Covol's  future
business  plans,  the  operation  of  facilities,   the  estimated  capacity  of
facilities,  the availability of coal fines, the  marketability of the synthetic
fuel  and  other  briquettes  and  the  financial   viability  of  the  proposed
facilities,  constitute  forward  looking  statements  within the meaning of the
Private Securities  Litigation Reform Act of 1995.  Although 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  stated in
these forward looking statements include, among others, the following:


     (1)      The commercial success of the Covol binder technologies.
     (2)      Procurement   of   necessary  equipment  to  maintain  facilities'
              operations.
     (3)      Securing of necessary sites,  including permits and raw materials,
              for facilities to be constructed and operated.
     (4)      Completion  of  facilities,   in  particular  the  synthetic  fuel
              manufacturing facilities, by the placed in service date.
     (5)      Ability to obtain  needed  additional  capital on terms acceptable
              to Covol.
     (6)      Changes in  governmental  regulations  or  failure to comply  with
              existing regulations which may result in operational  shutdowns of
              Covol or licensee facilities.
     (7)      The availability of tax credits under Section 29 of the tax code.
     (8)      The commercial  feasibility of the Covol  binder technologies upon
              the expiration of Section 29 tax credits.
     (9)      Ability  to meet  financial commitments under existing contractual
              arrangements.  
    (10)      Ability to  commercialize  the  non-synthetic  fuel  related Covol
              binder technologies which have only been tested in the  laboratory
              and not in full-scale operations.
    (11)      Dependence on licensees to  successfully  implement  Covol  binder
              technologies.
    (12)      The market acceptance of products  manufactured with  Covol binder
              technologies in the face of competition from traditional products.
    (13)      Ability to produce  products with Covol binder  technologies  with
              acceptable hardness, moisture level, and other characteristics.
    (14)      Success in the face of competition by others  producing  synthetic
              fuel and other  recycled  products.  
    (15)      Sufficiency of  intellectual  property protections.


ITEM 2.       PROPERTIES

     Covol leases an  approximately  5,000  square-foot  building in Lehi, Utah,
which houses its executive offices ("Corporate  Headquarters").  In August 1997,
Covol  entered into a triple-net  lease dated August 1, 1997 (the  "Headquarters
Lease"). The Headquarters Lease provides for a monthly rent of $5,000 during the
initial term which expires on July 31, 2000. Thereafter,  the Headquarters Lease
will automatically  extend  indefinitely for successive  one-year periods at the
sole option of Covol, and the monthly rent will increase by 5% per year.

                                       18
<PAGE>

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

     In May 1995,  Covol  entered into a lease with Geneva  Steel  Company for a
9,000 square foot building in Vineyard,  Utah.  Covol pays no cash rent on these
facilities. Subsequent to the execution of the Geneva Agreements, the lease with
Geneva expired resulting in a tenancy-at-will between the parties. Covol may use
the Geneva  briquetting  facility in the  manufacture  of synthetic  fuel or for
testing purposes at the Geneva site or some other location.

     In June 1996,  Covol entered into a land lease of approximately 12 acres in
Price,  Utah with a non-affiliated  party at a monthly rental of $600. The lease
term  commenced  on June 20, 1996 and  expires on  December  31, 2007 but may be
extended.  In 1996 Covol constructed a 22,000 square-foot  building to house the
Utah Synfuel #1 and Carbon Synfuel facilities.  In March 1997, this building was
subleased  by Covol to  Coaltech  as part of the  sale of the  Utah  Synfuel  #1
facility.  However, Covol retained responsibility for operations of the property
pursuant to an Operations and Maintenance  Agreement between Covol and Coaltech.
Covol has constructed an ancillary  building,  a 1,650 square-foot binder plant.
Coaltech  has  an  option  to  purchase  the  Carbon  Synfuel  facility,  and if
exercised, Coaltech will take ownership of the buildings.

     In February 1997, Covol entered into a lease agreement with Earthco for two
contiguous parcels located in Wellington,  Utah  (approximately 6 miles from the
Utah Synfuel #1 site). The first parcel covers  approximately 30 acres and has a
lease term of 15 years. On this parcel,  Covol  constructed a 3,400  square-foot
wash plant.  The second  parcel covers  approximately  357 acres and has a lease
term of 5 years. On this parcel, Covol conducts fines recovery operations. Covol
has  the  option  to  extend  or  purchase  either  or  both  parcels  upon  the
satisfaction of certain  conditions.  Total obligations to lease the parcels and
acquire the associated fines are approximately  $5.5 million,  of which $700,000
was paid at the time of lease  execution  and Covol has and will make payments 4
times each year until May of 2002 for the balance.

     In  1997,  Covol  entered  into a 5 year,  $850  per  month  sublease  with
Combustion Resources, Inc. for approximately 2,400 square feet of building space
in Provo, Utah.

     In 1997,  Covol entered into a one year,  $9,000 lease with Stephen Mallory
for  approximately  2,000 square feet of office and residential space in Dunbar,
West Virginia. This property serves as Covol's Eastern Region office.

     In 1998, Covol entered into a one year,  $1,500 per month lease with Mobile
Auto & Storage for  approximately  4,000 square feet of building  space in Lehi,
Utah.  This  property  provides  office and  laboratory  facilities  for some of
Covol's research and development personnel.

     In May 1998,  Covol  entered  into a 10 year,  $1,000  per year  lease with
Upshur Property,  Inc., for approximately 10 acres of property in Tallmansville,
Upshur  County,  West  Virginia.  The  property  is the site of the  Mountaineer
Synfuel  facility.  The lease is assignable to Mountaineer  Synfuel,  L.L.C., in
connection with its facility purchase option.

     In May 1998, Covol purchased approximately 80 acres of undeveloped property
near  Sunnyside,  Utah for  $100,000.  In June of 1998 Covol entered into a five
year lease with an option to purchase  approximately  40 acres of property  with
office and  warehouse  improvements.  The lease  payments  are $2,000 per month,
escalating to $3,500 per month over time. The leased property is adjacent to the
purchased property. Covol plans to conduct some operations on the two properties
in the future.

     None of Covol's subsidiaries have interests in real property.

ITEM 3.       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 of 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 of 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 its
resolution will have a material adverse effect on Covol.

                                       19
<PAGE>

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


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

     Covol held its Annual  Meeting of  Stockholders  on August 27, 1998. At the
meeting, the following actions were approved by the stockholders:

     James A.  Herickhoff  was elected a director of Covol for a three year term
to expire in 2001, by a vote of 7,703,272 in favor and 50,992 against.

     John P. Hill was  elected  a  director  of Covol  for a three  year term to
expire in 2001, by a vote of 7,694,872 in favor and 58,992 against.

     Selection  by the  Board  of  Directors  of  PricewaterhouseCoopers  LLP as
independent auditors of Covol for the 1998 fiscal year was ratified by a vote of
7,690,463 in favor, 15,610 opposed and 43,938 abstaining.

EXECUTIVE OFFICERS OF THE REGISTRANT


   NAME                 AGE                           POSITION

Brent M. Cook            38               Chief Executive Officer and Director

Stanley M. Kimball       44               President and Director

Steven G. Stewart        50               Chief Financial Officer

George W. Ford, Jr.      53               Principal Scientist and Vice President
                                          of Science and Technology

Steven R. Brown          40               Senior Vice President of Engineering
                                          and Development

Max E. Sorenson          49               Senior Vice President of Engineered
                                          Resources

Dee J. ("D.J.") Priano   53               Senior Vice President of Synfuel
                                          Engineered Fuels

Asael T. Sorensen, Jr.   44               Secretary and Corporate Counsel

Harlan M. Hatfield       38               Vice President and General Counsel

Kenneth R. Frailey       45               Vice President of Operations

Stephanie R. Black       36               Vice President of Research and
                                          Development

                                       20
<PAGE>


Brent M. Cook has served as Chief Executive  Officer and Director since November
1996,  as  President  from  October  1996 until  July 1998,  and served as Chief
Financial  Officer from June 1996 until  December  1996. Mr. Cook is a Certified
Public  Accountant.  Prior to joining Covol,  Mr. Cook was Director of Strategic
Accounts-Utah   Operations,   for   PacifiCorp,    Inc.   ("PacifiCorp").    His
responsibilities  included  the  management  of revenues of  approximately  $128
million per year, and seeking out and evaluating  strategic growth opportunities
for PacifiCorp,  including joint ventures and other transactions. Mr. Cook spent
more than 12 years with PacifiCorp.

Stanley M. Kimball was appointed  President in July 1998 and has been a Director
since January 1997.  He served as Chief  Financial  Officer from January 1997 to
July 1998.  Prior to  joining  Covol,  Mr.  Kimball  was  employed  by  Huntsman
Corporation  ("HC"). From 1989 to early 1995, Mr. Kimball served as the Director
of Tax for Huntsman Chemical  Corporation  ("HCC"). In May 1995, Mr. Kimball was
appointed as an officer of HCC,  serving as Vice  President,  Tax. In July 1995,
Mr.  Kimball was  appointed as Vice  President,  Administration  for HC. In this
position,  he had  numerous  responsibilities,  both  for HC and for Mr.  Jon M.
Huntsman  personally,  which  included  financial  accounting,  tax  and  estate
planning, and cash and investment management. In this position, Mr. Kimball also
served as Mr.  Huntsman's Chief of Staff. In 1980, Mr. Kimball received a Master
of Accountancy,  with emphasis in taxation, from Brigham Young University and is
a Certified Public Accountant.  Between 1980 and 1989, he was employed by Arthur
Andersen & Co., and was serving as a Senior Tax Manager prior to his  employment
with HCC.

Steven G. Stewart was appointed Chief  Financial  Officer of Covol in July 1998,
and served as Vice  President of Finance and  Treasurer  from April 1998 through
July 1998. Prior to joining Covol, Mr. Stewart was a partner for 11 years with a
"Big Five" accounting firm, an audit partner with Ernst & Young (formerly Arthur
Young)  and was the Salt  Lake  City  office  Director  of High  Technology  and
Entrepreneurial  Services. From January 1994 through September 1996, Mr. Stewart
was self-employed and provided consulting services to high technology companies,
established  strategic  alliances,  advised  companies on alternative  valuation
methods  applicable  to  acquisition  targets  and  negotiated  acquisition/sale
transactions.  From October 1996 through March 1998,  Mr. Stewart was a business
assurance  partner at  PricewaterhouseCoopers,  LLP (formerly  Coopers & Lybrand
LLP), with primary  responsibility  for public  companies  operating in the high
technology,  mining and extractive industries. Mr. Stewart is a Certified Public
Accountant.

George W. Ford, Jr. has served as Vice President of Research and  Development of
Covol since August 1993. From August 1993 to February 1997, Mr. Ford served as a
Director of Covol.  From 1982 to 1993, Mr. Ford was employed at Ballard  Medical
Products, Inc. in research and development, principally in the biomedical field.
Mr. Ford holds 17 national and international  patents covering a wide variety of
technologies.  Mr. Ford has functioned as an independent  consultant  working on
projects in computer  programming,  medical  product  device  design and process
polymer  chemistry design for the energy  industry.  Mr. Ford is a member of the
American  Association  for the  Advancement  of  Science  and the Iron and Steel
Society.

Steven  R.  Brown  was  appointed  Senior  Vice  President  of  Engineering  and
Development  in  December  1998.  Since July 1998 he served as Vice  President -
Synfuel  Operations.  Previously he served as Vice President of Engineering  and
Construction  of Covol since  February  1995.  Mr. Brown served as a Director of
Covol  from  September  1995 to March  1997.  From 1993 to 1995,  Mr.  Brown was
President  of  Construction  Management  Service,  Inc.  Mr. Brown is a licensed
professional engineer and a licensed general contractor.

Max E. Sorenson was appointed  Senior Vice President of Engineered  Resources in
December 1998. He served as Vice  President of Covol since April 1997.  Prior to
Mr. Sorenson's  employment with Covol, Mr. Sorenson was Senior Vice President of
Operations,  Engineering  and Technology of Geneva Steel Company.  Mr.  Sorenson
began his  employment  with Geneva  Steel  Company in October  1989.  During his
employment with Geneva Steel Company,  Mr. Sorenson also had  responsibility for
raw materials,  transportation contracts and information systems and also served
as Chief Engineer of Coke,  Iron and Steel,  and Vice President of  Engineering.
Prior to joining  Geneva Steel  Company,  Mr.  Sorenson  worked for 16 years for
Inland Steel,  Inc.,  one of the largest steel  companies in the United  States,
where he served in various  operational and technology  management  positions in
ironmaking and steelmaking. Mr. Sorenson obtained a B.S. degree in Metallurgical
Engineering  from the  University of Utah in 1973 and a Master of Science degree
in Industrial Management from Purdue University in 1978.

                                       21
<PAGE>

Dee J. "DJ" Priano was  appointed  Senior Vice  President of Synfuel  Engineered
Fuels in December  1998.  Prior  thereto,  he served as Vice  President of Covol
since August 1997.  Mr.  Priano had been employed by Kennecott  Corporation  for
more than 32 years prior to that time.  Mr. Priano  worked in several  different
positions at Kennecott  including  Principal  Planning  Engineer for Kennecott's
Bingham Canyon mine, Manager of Operations  Analysis,  Controller of Kennecott's
Bingham  Canyon  mine  as well  as the  Controller  of  Kennecott's  U.S.  Mines
Division.  In addition to managing  general  accounting and financial  reporting
activities,  he was responsible for the  administration  of purchasing,  MIS and
land and water management functions.  Mr. Priano received a BS degree and Master
of Business Administration from the University of Utah.

Asael T. Sorensen,  Jr. joined Covol as its legal Counsel in September  1995. He
has also served as Corporate  Secretary  since June 1996. From 1982 to 1995, Mr.
Sorensen was an in-house  attorney for the Church of Jesus Christ of  Latter-Day
Saints  in Salt Lake  City,  Utah and  practiced  law  primarily  in the area of
contract  negotiations and  administration.  Mr. Sorensen graduated from Brigham
Young   University   with  a  joint   Juris   Doctor  and  Master  of   Business
Administration. He is admitted to practice law in the State of Utah.

Harlan M. Hatfield has served as Vice  President and General  Counsel since July
1998 and Corporate Counsel since October 1996. His primary activities with Covol
have been the  development  of synthetic  fuel  projects,  including  licensing,
financing,  permitting,  construction,  feedstocks,  site  selection,  and other
aspects of project  development.  As General Counsel he oversees the legal staff
and outside legal counsel, litigation, regulatory disputes, contracts, and other
legal matters. Prior to his employment with Covol, he was in private practice at
the Seattle law firm of Oles, Morrison and Rinker for more than nine years where
he was a partner.

Kenneth R.  Frailey  joined  Covol in August  1998,  and in December  1998,  was
appointed  Vice  President of  Operations.  Until August 1998,  Mr.  Frailey was
employed  by  Kennecott   Corporation  and  General  Electric  for  a  total  of
approximately 20 years. Mr. Frailey's Kennecott experience related to mining and
electrical power generation,  and particularly  managerial  assignments in plant
operations and engineering.

Stephanie  E. Black  joined  Covol in March of 1998 as Director of Research  and
Development,  and in December 1998, was appointed Vice President of Research and
Development.  She was employed as a Strategic  Account  Manager with  PacifiCorp
from June of 1995 until joining Covol.  For the  approximately 11 years prior to
June 1995, Ms. Black was employed with Hercules, Inc. (now Alliant Techsystems).
While with  Hercules,  Ms. Black acted at various  times as  engineer,  analyst,
supervisor, and subcontract manager.

     Covol's  Executive  Officers are elected annually by the Board of Directors
and serve at the discretion of the Board.

                                       22
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

     The shares of common stock of Covol trade on The Nasdaq  National(R) Market
under the symbol "CVOL".

     The following table sets forth, for the periods presented, the high and low
trading prices of Covol's common stock as reported by Nasdaq from April 1998, to
September  1998,  and bid quotations as reported by National  Quotation  Bureau,
Inc.  from  October  1996  through  March 1998.  The  quotations  do not reflect
adjustments  for  retail  mark-ups,   mark-downs  or  commissions  and  may  not
necessarily  represent  actual  transactions.  Since  Covol has  several  market
makers,  the bid prices among the different  market makers will generally  vary.
Accordingly,  the bid price may not be  representative  of  actual  trades.  The
following prices may not be considered valid  indications of market value due to
the limited and sporadic trading in the shares of common stock.


                                                     Low         High

Fiscal 1997

Quarter ended December 31, 1996                    $7.50       $14.38
Quarter ended March 31, 1997                        7.88        15.75
Quarter ended June 30, 1997                         6.75         8.88
Quarter ended September 30, 1997                    6.25        10.13

Fiscal 1998

Quarter ended December 31, 1997                    $8.88       $13.94
Quarter ended March 31, 1998                       10.50        14.06
Quarter ended June 30, 1998                        12.25        17.44
Quarter ended September 30, 1998                    9.00        17.25



         As of December 17, 1998, there were  approximately  625 shareholders of
record of Covol's common stock.

         Covol has not paid  dividends  on its common stock to date and does not
intend to pay  dividends on its common stock in the  foreseeable  future.  Covol
intends to retain earnings,  if any, to finance the development and expansion of
its business and to pay debt service and dividends on preferred  stock.  Payment
of common stock  dividends in the future will depend,  among other things,  upon
Covol's  ability to  generate  earnings,  its need for  capital  and its overall
financial condition.

Recent Sales of Unregistered Securities

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

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

         Covol believes that the following  issuances of shares of common stock,
notes,  debentures  and  other  securities  were  exempt  from the  registration
requirements  of the  Securities  Act  of  1933,  as  amended,  pursuant  to the
exemption set forth in Section 4(2) thereof. Each security was issued subject to
transfer  restrictions.  Each  certificate  for each security bears a restricted
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 September and October 1997,  Covol  accepted  subscriptions  from 49
accredited investors for the purchase of 119,557 units (the "Units") pursuant to
a  Confidential  Private  Placement  Memorandum,  dated  August  28,  1997  (the
"Memorandum"),  at a price of $35.00 per Unit, with an aggregate  purchase price
of approximately

                                       23
<PAGE>

$4,200,000. Each Unit consisted of five shares of common stock of Covol together
with a warrant to purchase one additional  share of common stock at the price of
$8.00,  expiring April 30, 1998. Pursuant to the terms of the Memorandum,  Covol
granted to purchasers of the Units piggyback  registration  rights on the shares
of common stock  included in the Units and the shares of common stock which were
issuable upon the exercise of the warrants.  A total of 597,850 shares of common
stock and 119,557 warrants were issued in the offering.  Of the 119,557 warrants
issued to investors,  96,357 were  exercised and 23,300  expired.  In connection
with  the  sale of the  Units  under  the  Memorandum,  Covol  issued  to  three
accredited investors finder fees in the form of warrants to acquire an aggregate
of up to 199,262 shares of Covol's common stock at a purchase price of $8.00 per
share at any time prior to October 31, 1999, none of which had been exercised as
of September 30, 1998.

         On November 25,  1997,  Covol issued 1,500 shares of Covol common stock
to a single investor upon exercise of warrants at $8.00 per share, paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.

         On December 8, 1997, Covol issued 1,500 shares of Covol common stock to
a single  investor upon  exercise of warrants at $8.00 per share,  paid in cash.
The warrants were originally issued with Units privately placed in September and
October 1997.

         On January 9, 1998 Covol issued  warrants  for 216,272  shares of Covol
common stock at a per share exercise price of $10.00 to AJG Financial  Services,
Inc. ("AJG").  Also, on January 9, 1998 Covol issued warrants for 216,272 shares
of Covol  common  stock at a per share  exercise  price of $20.00 to AJG.  Covol
issued  these  warrants  as  partial  consideration  for AJG's  loan to Covol of
$4,367,351 under Covol's debenture to AJG dated January 9, 1998.

         On March 4, 1998 Covol issued 1,000,000 shares of Covol common stock to
PacifiCorp  Financial  Services,   Inc.,  pursuant  to  PacifiCorp   Financial's
conversion of its Convertible  Loan and Security  Agreement dated March 20, 1997
("Agreement").  On April 7, 1998 Covol  issued an  additional  27,000  shares of
Covol common stock to PacifiCorp  Financial as  satisfaction  of the  adjustment
provisions of the Agreement.

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

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

         During  September 1998 Covol  completed a financing of $1,500,000  that
consisted of the sale of 55,555 units at $27.00 per unit to an investor.  A unit
consisted of three shares of  restricted  common stock of Covol plus one warrant
to  purchase  one share of  restricted  common  stock at a price of $12.00.  The
warrants expire September 16, 2000 if not exercised.

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

                                       24
<PAGE>

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

ITEM 6.           SELECTED FINANCIAL DATA

         The following selected financial data are derived from the consolidated
financial  statements of Covol.  This information  should be read in conjunction
with the consolidated  financial  statements,  related notes and other financial
information  included  herein.  As  more  fully  described  in  Note  15 to  the
consolidated financial statements,  Covol sold its construction  subsidiaries in
1996. All construction - related  operations have been reflected as discontinued
operations in the 1996,  1995 and 1994 financial  statements.  The  construction
subsidiaries  include one business  which was acquired on September 30, 1994 and
therefore is included in discontinued operations in 1996 and 1995 only. The note
receivable received by Covol as consideration for the sale is "marked to market"
each quarter based on the market value of Covol's stock held as collateral,  and
the resulting adjustments are reflected in Covol's statement of operations.  The
selected  financial data as of and for the nine months ended September 30, 1994,
as of and for the year ended September 30, 1995 and as of September 30, 1996 are
derived from audited  financial  statements  not included  herein.  The selected
financial  data for the year ended  September  30,  1996,  and as of and for the
years  ended  September  30,  1997  and 1998  were  derived  from the  financial
statements  of Covol  which  have been  audited  by  PricewaterhouseCoopers  LLP
included elsewhere herein.
<TABLE>
<CAPTION>

                                                                                                        Nine Months
                                                                                                           Ended
                                                             Year Ended September 30,                  September 30,
                                                ---------------------------------------------------


(thousands of dollars, except per-share data)       1998          1997            1996            1995            1994
----------------------------------------------- ------------ --------------- --------------- --------------  -------------
OPERATING DATA:
<S>                                                  <C>         <C>             <C>              <C>              <C>    
     Total revenues                                  $12,699     $       251     $       295      $     129        $    20
     Loss from continuing operations                  (3,986)        (10,995)        (12,955)        (4,524)          (498)
     Net loss                                         (3,986)        (10,995)        (13,836)        (5,654)          (143)
     Basic and diluted net income (loss) 
      per common share:
         Loss per share from continuing
              operations                                (.43)          (1.38)          (1.86)         (1.00)          (.13)
         Net income (loss) per share                    (.43)          (1.38)          (1.99)         (1.25)          0.04
     Purchase of property, plant and
          equipment and facilities
          held for sale                               36,963           7,194           5,055            694            100
<CAPTION>

                                                                              September 30,
                                                 ------------------------------------------------------------------------
(thousands of dollars)                              1998          1997            1996            1995           1994
------------------------------------------------ ----------- --------------- --------------- --------------  ------------
BALANCE SHEET DATA:
<S>                                                 <C>            <C>             <C>           <C>           <C>      
     Working capital                                $  8,549        $  4,960         $(3,482)      $   (480)     $   (620)
     Net property, plant and equipment                14,902           5,464           7,125          1,330           748
     Total assets                                     66,897          26,361           8,772          2,660         4,853
     Long-term obligations                            16,279           5,467             364            177           852
     Total stockholders' equity (deficit)             21,571           5,929            (233)         1,183         2,990
</TABLE>

                                       25
<PAGE>

ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

         The following  discussion  and analysis  should be read in  conjunction
with the  information  set forth under the caption  entitled  "ITEM 6.  SELECTED
FINANCIAL  DATA"  and the  financial  statements  and  notes  thereto  for Covol
included elsewhere herein.



Year Ended September 30, 1998 Compared to Year Ended September 30, 1997

         The information set forth below compares Covol's  operating results for
1998 with its operating results for 1997.

         Revenues.  Total  revenues  for  the  year  ended  September  30,  1998
increased by $12,448,000 to $12,699,000 as compared to $251,000 for 1997. During
1998 Covol  recognized  license fees totaling  $7,942,000  while no license fees
were recognized  during 1997.  These fees consisted of one-time  advance license
fees of  $7,736,000  and earned  license  fees or royalty  payments of $206,000.
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  conditions  are met. Covol expects to receive
approximately $4,000,000 of additional advance license fees during 1999 upon the
sale of certain synthetic fuel facilities  currently owned by Covol and upon the
achievement  of  certain   production  levels  at  one  of  the  synthetic  fuel
facilities. Earned license fees or royalty payments are due quarterly based upon
synthetic  fuel produced and sold as reported to Covol by its  licensees.  Covol
had sales of binder  and coal  fines to a related  party  during  1998  totaling
$2,543,000  compared to $209,000 during 1997. These revenues resulted  primarily
from coal fines that were sold to the related  party at Covol's cost as provided
for under the binder and license agreement with this party. Substantially all of
the fines  purchased  by Covol have now been sold so sales of coal fines are not
expected to be material  during  1999.  Covol sold six binder  mixing  plants to
licensees  during 1998 for  $1,088,000,  generating  a gross profit of $200,000.
Covol does not expect sales of binder mixing plants during 1999.  Covol provides
binder material to its licensees either at a fixed price or at Covol's cost plus
a contracted  markup.  Covol  purchases the binder  materials  under a long-term
contract  with a large  chemical  company.  Total  binder sales during 1998 were
$994,000 with a corresponding direct cost to Covol of $642,000.  Covol expects a
significant  increase  during  1999  of  production  of  synthetic  fuel  by its
licensees as licensees move toward full  production  levels with a corresponding
increase  in  earned  license  fees or  royalty  payments  and  sales of  binder
products.  However,  Covol  cannot  assure  increases in license  fees,  royalty
payments,  and binder sales because Covol  licensees  must  successfully  obtain
adequate  feedstock coal fines,  process fines into synthetic  fuel, and develop
markets for  synthetic  fuel,  now and in the future.  Covol  believes  that its
licensees have made significant  progress in these areas, but continued  success
cannot be assured.

         Operating Costs and Expenses. Operating costs and expenses increased by
$4,205,000 or 38% to $15,310,000  during 1998 from $11,105,000 during 1997. Cost
of coal briquetting  operations increased $4,492,000 from $4,803,000 during 1997
to $9,295,000  during 1998. This increase  included  $4,121,000  relating to the
costs  associated  with binder plant sales,  binder sales and coal fine sales as
discussed above.  During 1997, Covol recorded an expense for $1,477,000 relating
to construction  penalties for failure to proceed under several  contracts Covol
had entered into.  There was no similar  expense in 1998.  However,  during 1998
Covol incurred  significantly  higher operating  expenses in connection with the
continued  refinement and  implementation  of the briquetting  process,  and the
commercialization of this process in connection with the 24 facilities placed in
service during 1998,  including the four facilities held for sale. Covol expects
to continue  incurring  losses into 1999 until these  facilities are sold. Covol
expects to realize a gain when the facilities are sold.  These expenses  related
in part to the  construction  and operation of four  synthetic  fuel  facilities
built by Covol that are  currently  held for sale,  costs  incurred in providing
assistance  to Covol's  licensees  during the  ramp-up of their  synthetic  fuel
facilities,   and  increased   personnel  costs.  These  increases  during  1998
effectively offset the 1997 construction penalty expenses. Covol operates one of
the synthetic fuel facilities for Coaltech, a partnership for which Covol is the
general  partner.  Under  this  operating  agreement,   Covol  is  contractually
obligated to purchase  all of the  synthetic  fuel  produced at cost plus $1 per
ton.  Production  of  synthetic  fuel from  this  facility  during  1998 was not
significant and accordingly,  the cost per ton is significantly in excess of the
current  market  value.  These costs and the  corresponding  write-down  of this
inventory

                                       26
<PAGE>

to its market value are included in the cost of coal briquetting operations. The
write-down was approximately  $1,400,000 during 1998 and $1,548,000 during 1997.
Covol expects the excess cost per ton to decrease in 1999 as production  volumes
increase.

         Research and  development  costs  decreased  during 1998 as a result of
Covol's  continued  focus  on  the   commercialization  of  the  synthetic  fuel
technology and the utilization of certain research and development  resources in
this endeavor.  Covol expects that research and development  costs will increase
in 1999 as Covol  focuses  resources  on further  refinement  of its  technology
relative  to the  synthetic  fuel / coal  industry  and the  application  of the
technology into other areas.

         Selling,  general and administrative  expenses increased  $1,438,000 or
48% to $4,436,000 during 1998 from $2,998,000 for 1997.  Approximately  $500,000
of this increase  related to a substantial  increase in travel and related costs
as Covol's  employees spent a significantly  greater amount of time at Covol and
licensee-owned facilities.  Covol believes that travel and related expenses will
decrease during 1999, but will continue to run at levels higher than 1997 due to
the ongoing activities that will be required at the 24 synthetic fuel facilities
utilizing Covol's patented  technology.  The balance of the increase in expenses
relates to approximately $250,000 of commissions incurred in connection with the
placement  of  synthetic   fuel  license   agreements,   $175,000  in  increased
professional  fees  and a  $500,000  increase  in  payroll  and  related  costs,
resulting from additional employees hired.

         Compensation expense on stock options,  stock warrants,  or issuance of
common stock  decreased  $1,119,000 or 54% to $939,000 for 1998 from  $2,058,000
for 1997.  This  decrease  is  attributable  to a change in policy to only grant
stock options at strike prices that are not  "in-the-money",  for the purpose of
providing  an incentive  to the  recipient of the options to create  shareholder
value.  The  majority of the 1998  expense  relates to options  granted in prior
years  that vest over  several  years and the  compensation  value that is being
recognized as an expense over the vesting period.

         In 1998,  Covol sold the facility owned by Alabama  Synfuel #1 Ltd. for
$6,500,000,  in exchange  for a note  receivable  due  February  2003. A loss of
$218,000 was incurred from the sale of this facility.  In 1997,  Utah Synfuel #1
sold its facility to Coaltech  for  $3,500,000,  evidenced by a promissory  note
payable in 44 quarterly  installments  of $130,000  starting March 31, 1997. The
actual  cost  to  construct  the  Utah  Synfuel  #1  facility  was   $4,082,000.
Accordingly,  a loss was incurred  from the sale of the Utah Synfuel #1 facility
in the amount of $582,000.

         During 1996, Covol sold certain construction  companies and received as
consideration a $5,000,000 note receivable  ("Note") with interest at 6% payable
over five years.  It was  determined  that the Note should be  discounted  to an
appropriate  market  rate and  accordingly,  the Note was  discounted  at 10.25%
resulting in a discount of $1,281,000.  The Note is  collateralized by stock and
stock options of Covol and is reflected in the balance  sheet at the  underlying
value of the  collateral.  Accordingly,  the Note is  "marked  to  market"  each
quarter  based upon the market value of Covol's  common stock.  This  adjustment
resulted  in income of $19,000  being  recognized  during  1998,  compared to an
expense of $60,000  recognized  during 1997. The Note is guaranteed by the buyer
of the construction companies and there has been no event of default or past due
payment on the Note.  Covol is  scheduled  to receive a $515,000  payment on the
Note in January  1999.  Covol does not  accrue  interest  on this Note and as of
September  30,  1998 the Note has a  carrying  value of  $1,609,000  in  Covol's
balance sheet.

         Other Income and Expense.  During 1998, Covol had net other expenses of
$1,375,000  compared to $141,000 for 1997.  This increase of $1,234,000  relates
primarily to an increase of $487,000 in net  interest  expense and a decrease of
$853,000 in minority  interest  in the net losses of  consolidated  subsidiaries
(Utah Synfuel #1 and Alabama Synfuel #1).  Interest  expense in 1999 is expected
to decrease  after the  repayment of debt related to  facilities  held for sale.
During September 1998, Covol offered the limited partners of Utah Synfuel #1 and
Alabama Synfuel #1 an exchange of their limited partnership interests for common
stock of Covol.  These exchanges,  most of which were accounted for in September
1998, were substantially  completed in 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. Covol believes the combined  operations of these
partnerships  will result in operating losses in the near-term future which will
be included in Covol's statement of operations.

                                       27
<PAGE>

         Loss from  Continuing  Operations.  For 1998, the loss from  continuing
operations decreased by $7,009,000 from $10,995,000 for 1997 to $3,986,000.  The
decrease is primarily due to the significant  increase in total revenues,  which
was  partially  offset  by  increased  operating  costs and  other  expenses  as
discussed previously.  Covol did not recognize any income tax benefit in 1998 or
1997 since the realization of its deferred tax assets,  consisting  primarily of
net  operating  loss  carryforwards,  depends on  generation  of future  taxable
income.

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996

         The information set forth below compares Covol's  operating results for
1997 with its operating results for 1996.

Continuing Operations

         Revenues.  For 1997,  total  revenues  decreased by $44,000 to $251,000
from  $295,000  for 1996.  There  were no  license  fees  recognized  in 1997 as
compared to $100,000  recognized  in 1996.  Covol  received  payment for related
party license fees in fiscal 1997 which were  attributable to a one-time advance
license  fee paid by  Coaltech,  a  partnership  for which  Covol  serves as the
general  partner,  upon the sale of the Utah  Synfuel  #1  facility.  Covol also
received a $250,000  payment in fiscal  1997 of a one-time  advance  license fee
from Birmingham Syn Fuel, L.L.C. upon the issuance of a private letter ruling to
Birmingham Syn Fuel by the Internal Revenue Service.  Because Covol is obligated
to render  future  services to Coaltech  and  Birmingham  Syn Fuel,  the advance
license fees are recorded as deferred  revenue and will be  recognized as income
in future  periods when its  obligations  are met. Net proceeds from the sale of
briquettes  decreased  in 1997 by  $153,000  to $42,000  from  $195,000 in 1996.
Notwithstanding  the Utah  Synfuel #1 facility  having been placed in service in
early  1997,  its  production  and sales of  synthetic  fuel were  significantly
curtailed due to the lack of adequate  quality feed stock for production.  Covol
did produce  approximately  18,000 tons of synthetic fuel during 1997;  however,
due to high levels of ash in the  feedstock  and hence in the end  product,  the
synthetic  fuel was  difficult to market.  Covol  received  revenues from binder
sales in the amount of $209,000 in 1997. No sales of binder were made in 1996.

         Operating Costs and Expenses.  Operating  costs and expenses  increased
$532,000 to $11,105,000 for 1997 from $10,573,000 for 1996.  Operating costs and
expenses   attributable  to  briquetting   operations  increased  $3,943,000  to
$4,803,000  for 1997 from  $860,000  for 1996.  On or before  December 31, 1996,
Covol entered into several contracts to construct synthetic fuel facilities.  In
order for the contracts to be binding for purposes of qualification  for Section
29 treatment, Covol agreed to pay a penalty of 6% of the expected contract price
for the facilities if Covol did not proceed with  construction.  As of September
30, 1997, there were several contracts that were not expected to be completed by
June 30, 1998.  Accordingly,  Covol  recorded the  liability for the penalty for
these facilities in 1997 in the amount of $1,477,000.  Covol also incurred costs
of $1,548,000 which were  attributable to the start-up and operation of the Utah
Synfuel #1 facility for Coaltech,  a partnership  for which Covol is the general
partner.  When Utah  Synfuel #1 and Covol sold the Utah  Synfuel #1  facility to
Coaltech,  Utah Synfuel #1 entered into an agreement to purchase  synthetic fuel
produced at the Utah Synfuel #1 facility for costs incurred plus $1 per ton. The
Utah  Synfuel #1 facility  incurred  significant  costs for coal  fines,  labor,
binder materials,  repairs and maintenance,  equipment rental and other costs to
work  through  various  operational  issues.  These  costs are  included  in the
synthetic  fuel  purchase  commitment  and therefore are included in the cost of
coal briquetting  operations.  The remaining costs for briquetting operations in
1997 were more than in 1996 due to material  and labor costs for the  continuing
refinement and  implementation  of the briquetting  process and is reflective of
the phase of  commercialization  and operation Covol was in for 1997 as compared
to 1996.

         Research and development  costs  decreased  $380,000 or 36% during 1997
from $1,044,000 for 1996. This decrease is due to Covol's focus of resources and
efforts on the  commercialization  of its synthetic fuel technology through: the
construction and start-up of its first full scale  briquetting  facilities,  the
Utah and  Birmingport  plants;  the licensing of the  Briquetting  Technology to
other  licensees;  and the  development  of other projects that will utilize the
Briquetting  Technology in the manufacture of synthetic  fuels.  The majority of
the 1997 costs were principally attributable to research and development efforts
related to Covol's synthetic fuels technology.

                                       28
<PAGE>

         Selling,  general and administrative  expense decreased $798,000 or 21%
to  $2,998,000  for  1997  from  $3,796,000  for  1996.  The  decrease   related
principally   to  reductions  in  costs  for   administrative   labor,   outside
professional  services and travel  expenses.  The reduction in these expenses is
due to Covol's use of personnel,  resources and efforts on the commercialization
of the Covol binder technologies.

         Compensation  expense on stock options,  stock warrants and issuance of
common stock decreased  $2,815,000 or 58% to $2,058,000 for 1997 from $4,873,000
for 1996. The decrease is  attributable to reduction in the use of stock options
in  compensating  employees  and  consultants  of Covol.  The  reduction is also
reflective of a general  change in Covol  philosophy  regarding the strike price
for options granted.  Generally,  fewer stock options granted by Covol have been
"in-the-money",  thus serving as an incentive to the recipient of the options to
add value to Covol.

         In 1997,  Utah Synfuel #1 sold its facility to Coaltech for $3,500,000,
evidenced by a promissory note payable in 44 quarterly  installments of $130,000
starting  March 31, 1997.  The actual cost of Utah  Synfuel #1 to construct  the
facility was $4,082,000.  Accordingly,  a loss was incurred from the sale of the
Utah Synfuel #1 facility in the amount of $582,000.

         Other  Income  and  Expense.  In 1996,  Covol had net other  expense of
$2,654,000  and in 1997 had net other  expense of $141,000 for a net decrease in
other  expense of  $2,513,000.  In 1996,  Covol was  required,  under  generally
accepted  accounting  principles,  to write down the  discounted  $5,000,000  6%
promissory note (the "Note") from the sale of the construction  companies to the
ascertainable  value of the property  collateralizing  the Note. This accounting
treatment  resulted  in a  write-down  of  $2,700,000  in 1996.  The  additional
write-down  in 1997 of  $60,000  resulted  from the  change  in the value of the
property  collateralizing  the Note.  The Note is guaranteed by the buyer of the
construction  companies  and  there  has been no event  of  default  or past due
payment on the Note.  The  remaining  difference in net other expense is made up
principally of interest expense of $1,645,000, of which $1,438,000 was booked as
a result of the  transaction  Covol entered into with PacifiCorp with respect to
the $5,000,000  convertible debt instrument (see discussion below). This expense
is partially  offset by the net change in the addback for  minority  interest in
net losses of consolidated  subsidiaries of $1,241,000  ($4,000 in 1996 compared
to $1,245,000 in 1997). The increase is attributable to the minority interest in
the loss incurred by Utah Synfuel #1 in 1997. The current period  represents the
first full year of  operations  of Utah  Synfuel  #1.  Utah  Synfuel #1 incurred
losses in 1997 due to:  the sale of the Utah  Synfuel #1  facility  at an amount
less than its cost (after  adjustment  for the  installation  of the new dryer),
start-up  costs for the facility,  expense  incurred for license  fees,  and the
obligation to purchase synthetic fuels produced at a price equal to cost plus $1
per ton.

         In July 1996, Covol negotiated with PacifiCorp the general terms of the
sale of the Birmingport facility,  including an arrangement for convertible debt
in the amount of up to $5,000,000 to fund working capital and construction costs
needed to complete the Birmingport  facility. At the time of these negotiations,
Covol agreed to a conversion price of $7 per share, the trading price of Covol's
stock  at the  time the deal was  initially  negotiated.  The  actual  documents
completing this agreement were not finalized until March 20, 1997, at which time
the bid price of the  common  stock of Covol  was  approximately  $9 per  share.
Notwithstanding  the  fact  that at the  time  Covol  initially  negotiated  the
conversion  price there was no discount,  because there was a discount as of the
date the  documents for the  transaction  were  completed and signed,  Covol was
required  to reflect  as  interest  expense  the deemed  discounted  value,  the
difference at the date of issue of the  convertible  debt  security  between the
conversion  price and the fair market  value of the common  stock into which the
security  is  convertible,  multiplied  by the  number of shares  into which the
security is convertible.  The expense did not require an actual cash payment nor
did it impact the net equity of Covol.  This accounting  treatment is consistent
with guidance issued by the Securities and Exchange Commission and with guidance
issued as of March  13,  1997 by the  Emerging  Issues  Task  Force of the AICPA
(Statement EITF D-60: Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature).

         Loss from Continuing Operations.  For 1997, Covol had a net decrease of
$1,960,000 in loss from continuing  operations.  The decrease is principally due
to:  reductions  in research  and  development  costs and  selling,  general and
administrative costs; reductions in expenses for compensation expense from stock
options,  stock  warrants and  issuance of common  stock;  and  reduction in the
write-down of notes receivable. These reductions

                                       29
<PAGE>

were  partially  offset  by:  increases  in costs  for  briquetting  operations,
including losses  attributable to the Utah Synfuel #1 facility and penalties for
failure to proceed with construction  contracts;  loss from the sale of the Utah
Synfuel #1 facility,  and interest expense booked on the PacifiCorp  convertible
debt.  Covol did not recognize any income tax benefit in 1997 or 1996 related to
net  operating  loss  carryforwards  since the  realization  of the deferred tax
assets depends on generation of future taxable income.

Discontinued Operations

         For 1996,  Covol incurred  losses from  discontinued  operations in the
total amount of $881,000.  No additional  losses were recorded from discontinued
operations in subsequent years.

Liquidity and Capital Resources

         Liquidity.   During  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 that are either under option
to  purchase  or are being  offered for sale.  Covol  anticipates  sale of these
facilities  during the year ending September 30, 1999. The majority of the funds
received  from sale of these  facilities  will be used to  retire  debt that was
incurred  principally in connection with the construction and operation of these
facilities and activities relative to the completion of the other synthetic fuel
facilities.  Net cash used in  operating  activities  increased  by  $840,000 to
$5,042,000  during 1998 from $4,202,000  during 1997. Covol was able to fund its
operating  activities,  including the continued refinement and commercialization
of it patented  briquetting  technology,  through the incurrence of debt and the
issuance of convertible  preferred stock,  common stock and related common stock
warrants.

         Capital  Resources.  During 1998,  Covol used net cash in its investing
activities  totaling  $38,388,000  compared to $7,181,000  for 1997.  These uses
consisted  principally of purchases of property,  plant and  equipment,  a major
portion of which related to the four facilities  currently held for sale. During
1998,  proceeds  from the issuance of notes payable and  convertible  debentures
totaled  $35,454,000  and issuance of common  stock  totaled  $3,257,000.  Covol
believes that funds required for investing activities will be significantly less
during 1999 because the  construction of facilities that produce  synthetic fuel
that  qualifies for federal  income tax credits under Section 29 of the IRC were
completed during 1998.

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

         To  provide   funding  for  Covol's   operations   and  debt  repayment
requirements during early 1999, Covol will utilize proceeds from the issuance of
debt and equity  securities  and excess  proceeds  from the sale of  facilities.
During  November  1998,  Covol issued common stock and common stock warrants for
total proceeds of approximately  $3,500,000 and incurred debt totaling $400,000.
Covol has received term sheets for the sale of up to  $10,000,000 of convertible
preferred stock.  This financing is expected to close in January 1999. Covol has
received correspondence from the lender holding notes payable due March 1999 and
June 1999  indicating  a  willingness  to extend the due dates for 90 days if so
requested by the Company.  If such a request is made,  Covol has agreed to issue
warrants for the purchase of common stock to the lender as consideration for the
extension.  Covol believes the funds raised in this financing will be sufficient
to fund Covol's  operations and debt repayment  requirements until its operating
activities begin producing positive cash flow.

                                       30
<PAGE>

Forward Looking Statements

         Statements  in this Item 7  regarding  Covol's  expectations  as to the
financing,  development and construction of facilities  utilizing Covol's binder
technologies,  the receipt of licensing and royalty fees, revenues,  the receipt
of  operation  and  maintenance  fees,  the  receipt  of fees for sale of binder
materials, and other information presented herein that are not purely historical
by nature,  constitute  forward  looking  statements  within the  meaning of the
Private Securities  Litigation Reform Act of 1995.  Although Covol believes that
its  expectations are based on reasonable  assumptions  within the bounds of its
knowledge of its business and operations,  there can be no assurance that actual
results will not differ materially from its expectations. In addition to matters
affecting  Covol's  industry  or the coal  industry  or the  economy  generally,
factors which could cause actual results to differ from  expectations  set forth
in  the  above-identified  forward  looking  statements  include  in  part,  the
following:

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

         See "ITEM 1. BUSINESS--Forward Looking Statements" for a description of
additional factors which could cause actual results to differ from expectations.

Year 2000 Issues

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

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

         During 1998 Covol  upgraded its network  operating  system and believes
that system is Year 2000  compliant  and that any  additional  upgrading to that
system will not be  significant.  Covol utilizes  computer  applications  in the
finance and accounting  departments  and in the corporate  office that utilize a
two-digit date that will need to be upgraded in order to be Year 2000 compliant.
Covol has contacted the providers of this software and they have  indicated that
Year 2000 compliant software will be available in early 1999. Covol believes the
cost  to  purchase  this  upgraded   software  and  to  convert  the  applicable
applications to this new software will be less than $50,000.  Covol  anticipates
that this  conversion  will be completed by June 30,  1999.  The costs  incurred
during 1998 to upgrade the network operating  systems was approximately  $25,000
and is included in selling, general and administrative expenses.

                                       31
<PAGE>

Impact of Inflation

         During 1998,  cost increases to Covol were not  materially  impacted by
inflation.

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.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial  statements and supplementary  financial data required by
this Item 8 are set forth in Item 14 of this Form 10-K.  All  information  which
has been omitted is either inapplicable or not required.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         There are no changes in or disagreements with Accountants on accounting
or financial statement disclosure.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information to be set forth under the caption "Item 1: Election of
Directors" in Covol's Proxy  Statement  dated on or about January 25, 1999,  for
the Annual  Meeting of  Shareholders  to be held on or about March 18, 1999 (the
"Proxy  Statement"),  and the  information  to be set forth  under  the  caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement
are incorporated herein by reference. The information set forth under "Executive
Officers of Covol" in Part I hereof is also incorporated herein by reference.

ITEM 11.          EXECUTIVE COMPENSATION

         The   information  to  be  set  forth  under  the  caption   "Executive
Compensation"  in the Proxy  Statement  is  incorporated  herein  by  reference;
provided,  however,  that Covol specifically excludes from such incorporation by
reference any information set forth under the captions  "Compensation  Committee
Report on Executive  Compensation"  and "Stock Price  Performance  Graph" in the
Proxy Statement.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Security  ownership of certain  beneficial  owners and management to be
set forth under the caption  "Security  Ownership  of  Directors,  Nominees  and
Principal  Stockholders"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  to be set forth under the caption  "Transaction  with
Related Parties" in the Proxy Statement is incorporated herein by reference.

                                       32
<PAGE>


                                     PART IV

ITEM 14.          EXHIBITS,  FINANCIAL  STATEMENT SCHEDULES, AND REPORTS ON FORM
                  8-K

(a)      1.       Financial Statements


Consolidated Financial Statements of Covol Technologies, Inc.

Report of Independent Accountants......................................    F-1

Consolidated Balance Sheets as of September 30, 1998 and 1997..........    F-2

Consolidated Statements of Operations
         for the years ended September 30, 1998, 1997 and 1996.........    F-4

Consolidated Statements of Changes in Stockholders' Equity
         for the years ended September 30, 1998, 1997 and 1996.........    F-5

Consolidated Statements of Cash Flows
         for the years ended September 30, 1998, 1997 and 1996.........    F-9

Notes to Consolidated Financial Statements.............................   F-11

         2.       Financial Statement Schedules

         All financial  statement  schedules for which  provision is made in the
applicable accounting  regulations of the Securities and Exchange Commission are
not required under the related  instructions or are inapplicable,  and therefore
have been omitted.

         3.       Listing of Exhibits

         Certain  other  instruments  which  would  otherwise  be required to be
listed below have not been so listed  because such  instruments do not authorize
securities  in an amount which  exceeds 10% of the total assets of Covol and its
subsidiaries  on a consolidated  basis and Covol agrees to furnish a copy of any
such instrument to the Commission upon request.

         There is  included a Restated  Financial  Data  Schedule  for the years
ended September 30, 1997 and 1996.

                                       33
<PAGE>


Exhibit No.                      Description                            Location

2.1              Agreement and Plan of Reorganization, dated July 1,      (1)
                 1993 between Covol and the            
                 Stockholders of R1001

2.2              Agreement and Plan of Merger dated August 14, 
                 1995 between Covol and Covol                             (1)
                 Technologies, Inc., a Delaware corporation

2.3              Stock Purchase Agreement, dated July 1, 1993,            (1)
                 among Covol, Lloyd C. McEwan, Michael McEwan, 
                 Dale F. Minnig and Ted C. Strong regarding the 
                 purchase of Industrial Management & Engineering, 
                 Inc. and Central Industrial Construction, Inc.

2.4              Stock Sale Transaction Documentation, effective          (1)
                 as of September 30, 1994, between Covol and 
                 Farrell F. Larson regarding Larson Limestone 
                 Company, Inc.

2.5              Stock Purchase Agreement dated February 1, 1996          (1)
                 by and among Covol, Michael McEwan and Gerald 
                 Larson regarding the sale of State, Inc., 
                 Industrial Engineering & Management, Inc., 
                 Central Industrial Construction, Inc., and 
                 Larson Limestone Company, Inc.

2.5.1            Amendment to Share Purchase Agreement regarding          (1)
                 the sale of the Construction  Companies

2.5.2            Amendment No. 2 to Share Purchase Agreement              (2)
                 regarding the sale of the Construction Companies

3.1              Certificate of Incorporation of Covol                    (1)

3.1.1            Certificate of Amendment of the Certificate of           (1)
                 Incorporation of Covol dated January 22, 1996

3.1.2            Certificate of Amendment of the Certificate of           (6)
                 Incorporation dated June 25, 1997          

3.1.3            Certificate of Designation, Number, Voting Powers,       (7)
                 Preferences and Rights of Covol's Series A 6%
                 Convertible Preferred Stock (Originally designated 
                 as Exhibit No. 3.1.2)

3.1.4            Certificate of Designation,  Number, Voting Powers,      (8)
                 Preferences and Rights of  Covol's Series B 
                 Convertible  Preferred Stock (Originally designated
                 as Exhibit No. 3.1.3)

3.2              By-Laws of Covol                                         (1)

3.2.1            Certificate of Amendment to Bylaws of Covol dated 
                 January 31, 1996                                         (1)

3.2.2            Certificate of Amendment to the Bylaws dated May         (6)
                 20, 1997 (Originally designated as Exhibit No. 3.2.1)

3.2.3            Certificate of Amendment to the Bylaws dated June 25,    (6)
                 1997 (Originally designated as Exhibit No. 3.2.2)

4.1              Promissory Note between Covol and Mountaineer           (12)
                 Synfuel, L.L.C. dated May 5, 1998 (filed as 
                 Exhibit 10.52.2 hereto)

                                       34
<PAGE>

Exhibit No.                       Description                          Location

4.2              Promissory Note dated December 8, 1998 of Covol to       *
                 Mountaineer Synfuel, L.L.C.(filed as Exhibit 
                 10.52.4 hereto)

4.3              Security Agreement dated December 8, 1998 between        *   
                 Mountaineer Synfuel, L.L.C. and Covol (filed as 
                 Exhibit 10.52.5 hereto)

9.1              Special Powers of Attorney Coupled With an Interest     (1)
                 dated February 1, 1996 between Covol, Gerald Larson
                 and Michael McEwan

10.1             License Agreement, dated June 30, 1995, between         (1)
                 Covol and Greystone Environmental Technologies, 
                 relating to the Greystone Joint Venture

10.1.1           First Amendment dated January 3, 1996 to the            (1)
                 License Agreement dated June 30, 1995 between 
                 Covol and Greystone Environment Technologies

10.2             Briquetting Services Agreement, dated May 5, 1995,      (1)
                 between Geneva Steel Company and Covol

10.2.1           Amended and Restated Briquetting Service                (3)
                 Agreement, dated May 14, 1996,  between Covol 
                 and Geneva Steel Company

10.3             Lease Agreement, dated May 5, 1995 between              (1)
                 Geneva Steel Company, as landlord, and Covol,
                 as tenant

10.3.1           First Amendment to Lease Agreement, dated May           (3)
                 14, 1996 between Geneva Steel Company, as 
                 landlord, and Covol, as tenant

10.4             Master Equipment Lease Agreement, dated May             (1)
                 4, 1995, between Keycorp Leasing Ltd. and Covol

10.5             1995 Stock Option Plan                                  (1)

10.5.1           First Amendment to the 1995 Stock Option Plan           (1)

10.6             Employment Agreement, dated January 1, 1992, with       (1)
                 Kenneth M. Young                        

10.7             Employment Agreement, dated July 1, 1992, with          (1)
                 Russell Madsen                             

10.8             Lease Agreement, dated May 31, 1994, between            (1)
                 Covol and Byrleen Hanson regarding Carbon
                 County, Utah

10.9             Standard Form of Agreement between Owner and            (1)
                 Design Builder dated December 28, 1995 between 
                 Covol and Lockwood Greene Engineers, Inc.

10.9.1           Notice to Proceed from Covol to Lockwood Greene         (1)
                 Engineers, Inc. dated January 14, 1996

10.9.2           Letter Agreement with Lockwood Greene Engineers,        (1)
                 Inc. to extend notice dates.           

10.9.3           Letter dated July 26, 1996 from Lockwood Greene         (3)
                 Engineers, Inc. and the Memorandum of Understanding 
                 between Covol Technology, Inc. and Lockwood
                 Greene Engineers, Inc. dated August 28, 1996

                                       35
<PAGE>

Exhibit No.                    Description                            Location

10.9.4           Amendment to Standard Form of Agreement between         (3)
                 Owner and Design/Builder dated December 28, 1995,
                 dated September 16, 1996, between Covol and
                 Lockwood Greene Engineers, Inc.

10.10            Engagement Letter dated December 18, 1995 by and        (1)
                 between Covol and Smith Barney

10.10.1          Termination Letter, dated July 8, 1996, from            (3)
                 Smith Barney                                 

10.11            Letter of Understanding dated January 30, 1996          (1)
                 between Covol and CoBon Energy, LLC

10.11.1          Modification of Letter of Understanding dated           (3)
                 August 20, 1996 between Covol and CoBon Energy, LLC

10.11.2          License Agreement dated September 10, 1996, between     (3)
                 Covol and CoBon Energy, LLC

10.11.3**        Project Development Agreement, dated December 30,       (9)
                 1996, between Covol and CoBon Energy LLC

10.11.4**        Modification of Project Development Agreement,          (9)
                 dated December 31, 1996, between Covol and CoBon 
                 Energy, LLC

10.12            [Intentionally Omitted]

10.13            Promissory Note dated February 15, 1996 in favor        (1)
                 of Covol from Michael McEwan and Gerald Larson

10.14            [Intentionally Omitted]
 
10.15            Agreement between Alabama Power Company and             (3)
                 Covol for the Sale and Purchase of Coal, dated 
                 April 16, 1996, between Covol and the Alabama 
                 Power Company

10.16            Employment Agreement, dated June 1, 1996 with           (3)
                 Brent M. Cook                               

10.16.1          Stock Option Agreement dated June 1, 1996 with          (3)
                 Brent M. Cook                             

10.18            Letter dated July 19, 1996 from Covol canceling         (3)
                 the Site Identification Agreement        

10.19            Term Sheet, dated August 22, 1996, from Covol           (3)
                 common stock to Byrleen Hanson regarding purchase 
                 of Price, Utah office building


10.20            Primary Agreement, dated November 6, 1996, between      (3)
                 Covol and Savage Industries Inc.

10.20.1          Mojave Agreement, dated November 6, 1996, between       (3)
                 Covol and Savage Industries Inc.

10.21            Release to all claims, dated September 13, 1996,        (3)
                 executed by Maynard Moe                  

                                       36
<PAGE>

Exhibit No.                       Description                          Location

10.22            Letter of Understanding, dated September 13, 1996,      (3)
                 between Covol and E.J. Hodder & Associates, Inc. 
                 regarding the sale of the Port Hodder facility
                 to Covol

10.23            Sublease, dated September 9, 1996, between Covol        (3)
                 and Parker Towing Company, Inc. regarding the 
                 lease of approximately 16 acres located in 
                 Tuscaloosa County, Alabama

10.24            Supply Agreement, dated September 11, 1996,             (3)
                 among Covol, K-Lee Processing, Inc. and Concord 
                 Coal Recovery Limited Partnership

10.25            PacifiCorp Financial Services, Inc. Letter of           (3)
                 Intent (Covol Technologies) dated September 12, 1996

10.26            Exclusive Financial Advisor Agreement, dated            (3)
                 September 16, 1996, between Covol and Coalco 
                 Corporation

10.27            Settlement Agreement, dated September 17, 1996,         (3)
                 among   Covol,   Environmental   Technologies   Group
                 International,  Inc., Larson Limestone Company, Inc.,
                 Michael M. Midgley,  Mark Hardman,  Kenneth M. Young,
                 Irene Larson,  Farrell  Larson,  Gary  Burningham and
                 Burningham Enterprises, Inc.

10.28            Debenture Agreement and Security Agreement, dated       (3)
                 December 20, 1996,  between AJG  Financial  Services,
                 Inc. and Covol

10.29            Arthur J. Gallagher & Co. Letter of Intent, dated       (3)
                 November 13, 1996

10.30            Lease Agreement, dated December 12, 1996, between       (3)
                 Covol  and  UPC,  Inc.  regarding  Price  City,  Utah
                 property

10.31            1996 Standard Form of Agreement between Owner and       (3)
                 Design/Contractor

10.32            Form of Limited Partnership Agreements for Alabama      (3)
                 Synfuel #1, Ltd.  ("AS #1") and Utah Synfuel #1, Ltd.
                 ("US #1")

10.33            Utah Project Purchase Agreement, dated as of            (4)
                 March 7, 1997, by and among Covol,  US #1, a Delaware
                 limited  partnership,  and  Coaltech  No. 1, L.P.,  a
                 Delaware limited partnership ("Coaltech")

10.34            License and Binder Purchase Agreement, dated as of      (4)
                 March 7, 1997, by and among Covol, US #1 and Coaltech

10.35            Operation and Maintenance Agreement, dated as of        (4)
                 March 7, 1997, by and between Covol and Coaltech

10.36            Purchase and Supply Agreement, dated as of March        (4)
                 7, 1997, by and among Covol, US #1 and Coaltech

10.37            Abandonment Option Agreement, dated as of March 7,      (4)
                 1997, by and among Covol and the limited  partners of
                 Coaltech

10.38            Convertible Loan and Security Agreement, dated as       (5)
                 of  March  20,  1997,   by  and  between   Covol  and
                 PacifiCorp Financial Services, Inc. ("PacifiCorp")

                                       37
<PAGE>

Exhibit No.                    Description                             Location

10.38.1          Amendment to Convertible Loan and Security              (9)
                 Agreement,  dated  December  12,  1997 by and between
                 Covol and PacifiCorp

10.39            Alabama Project Purchase Agreement ("Alabama            (5)
                 Agreement")  dated as of March 20, 1997, by and among
                 Covol, AS #1 and Birmingham Syn Fuel, L.L.C.

10.39.1          Letter Amendment, dated June 27, 1997, to               (9)
                 Alabama Agreement.                              

10.39.2 **       Letter Amendment, dated July 7, 1997, to                (9)
                 Alabama Agreement.                               

10.39.3          Letter Amendment, dated August 28, 1997, to             (9)
                 Alabama Agreement.                            

10.39.4          Letter Amendment, dated December 12, 1997, to           (9)
                 Alabama Agreement.                          

10.39.5 **       Amended and Restated License Agreement, and Binder      (9)
                 Purchase dated December 12, 1997, by and among Covol,
                 AS #1 and Birmingham Syn Fuel.

10.39.6**        Letter Amendment dated February 20, 1998, to the       (10)
                 Alabama Project Purchase  Agreement dated as of March
                 20, 1997, by and among Covol,  AS #1, and  Birmingham
                 Syn Fuel.

10.39.7          Call Option Agreement date February 20, 1998,          (10)
                 between Birmingham Syn Fuel and Covol.

10.39.8**        Letter Amendment dated February 20, 1998, to the       (10)
                 Amended  and  Restated  License  and Binder  Purchase
                 Agreement dated as of December 12, 1997, by and among
                 Covol. AS #1 and Birmingham Syn Fuel.

10.39.9**        Non-negotiable Promissory Note dated February 20,      (10)
                 1998, in favor of AS #1,  executed by Birmingham  Syn
                 Fuel as debtor.

10.39.10         Security Agreement dated February 20, 1998, by and     (10)
                 among Covol, AS #1 and Birmingham Syn Fuel.

10.40            Conditional Option Agreement, dated as of March 20,     (5)
                 1997,  by and  among  Birmingham  Syn  Fuel I,  Inc.,
                 Birmingham Syn Fuel II, Inc.,  PacifiCorp,  AS #1 and
                 Covol

10.41            Registration Rights Agreement, dated as of March 20,    (5)
                 1997, by and between Covol and PacifiCorp

10.42**          Amended and Restated Agreement Concerning               (9)
                 Additional  Facilities,  dated  December 12, 1997, by
                 and between PacifiCorp., Birmingham Syn Fuel, LLC and
                 Covol

10.43            Lease Agreement between Industrial Management           (9)
                 Engineering, Inc. and Covol

10.44            Employment Agreement, dated January 1, 1997             (9)
                 with Stanley M. Kimball

10.45**          License and Binder Purchase Agreement, dated            (9)
                 December 14, 1997, between Appalachian  Synfuel,  LLC
                 and Covol

                                       38
<PAGE>

Exhibit No.                  Description                               Location
10.46**          Financing Agreement, dated November 14, 1997,           (9)
                 between Covol and CoBon Energy, L.L.C.

10.47**          License Agreement, dated as of August 5, 1997,          (9)
                 by and between Pelletco Corporation and Covol

10.48**          Preparation Plant and Find Ponds Lease                  (9)
                 (Wellington,  Utah), dated February 21, 1997, between
                 Earthco and Covol

10.49**          Agreement Concerning Additional Facilities,             (9)
                 dated  December  27,  1996,   between  AJG  Financial
                 Services, Inc. and Covol

10.50**          Form of Agreement for Technology Licensing of           (9)
                 Facilitation,  dated  December 31,  1996,  between PC
                 West Virginia Synthetic Fuel #1, LLC and Covol

10.50.1**        Form of Amended and Restated License and Binder        (11)
                 Purchase Agreement dated February 3, 1998, between PC
                 Virginia   Synthetic   Fuel  #1,  PC  West   Virginia
                 synthetic Fuel #2, PC West Virginia Synthetic Fuel #3
                 and Covol.

10.50.2**        Loan Agreement between C.C. Pace Capital, L.L.C. and   (11)
                 Carbon  Resources,  Inc.  and Covol  dated  April 21,
                 1998.

10.50.3          Security Agreement between C.C. Pace Capital, L.L.C.   (11)
                 and Carbon Resources,  Inc. and Covol dated April 21,
                 1998.

10.51            Employment Agreement, dated March 20, 1997 with         (9)
                 Max E. Sorenson

10.52**          Technology License and Binder Purchase Agreement       (12)
                 between Mountaineer Synfuel,  L.L.C.,  Licensee,  and
                 Covol, Licensor

10.52.1          Asset Purchase Agreement between Mountaineer Synfuel,  (12)
                 L.L.C.  as Purchase  and Covol as Seller dated May 5,
                 1998

10.52.2          Promissory Note between Covol and Mountaineer          (12)
                 Synfuel, L.L.C. dated May 5, 1998

10.52.3          Deed of Ground Lease between Upshur Property,          (12)
                 Inc. and Covol dated May 5, 1998

10.52.4          Promissory Note dated December 8, 1998 of Covol         *
                 Technologies, Inc. to Mountaineer Synfuel, L.L.C.

10.52.5          Security Agreement dated December 8, 1998 between       *
                 Mountaineer  Synfuel,  L.L.C. and Covol Technologies,
                 Inc.

10.52.6          Leasehold Credit Line Deed of Trust and Security        *
                 Agreement   dated   December   8,   1998   by   Covol
                 Technologies, Inc. for Mountaineer Synfuel, L.L.C. as
                 Beneficiary.

10.52.7          Amendment No. 1 to Deed of Ground Lease dated           *
                 December 8, 1998 between  Upshur  Property,  Inc. and
                 Covol Technologies, Inc.

10.53.1          Debenture  Agreement and Security Agreement             *
                 dated as of January 9,  1998,  between  Covol and AJG
                 Financial Services, Inc.

                                       39
<PAGE>

Exhibit No.                   Description                              Location

10.53.2          Debenture dated as of January 9, 1998 between           *
                 Covol and AJG Financial Services, Inc.

10.53.3          Warrant A dated as of January 9, 1998, issued by        *
                 Covol in favor of AJG Financial Services, Inc.

10.53.4          Warrant B dated as of January 9, 1998, issued by        *
                 Covol in favor of AJG Financial Services, Inc.

10.53.5          Registration Rights Agreement dated as of January       *  
                 9, 1998,  between Covol and AJG  Financial  Services, 
                 Inc.

10.54            Employment Agreement effective May 1, 1998 with         *
                 Steven G. Stewart

10.55            Employment Agreement effective August 1, 1997           *
                 with Dee J. Priano

16.1             Letter to Securities and Exchange Commission,          (1)
                 dated March 24,  1995,  from Jones,  Jensen & Orton &
                 Company, certified public accountants

21.1             List of Subsidiaries of Covol                           *

23.1             Consent of PricewaterhouseCoopers LLP                   *

27.1             Financial Data Schedule for the fiscal year 
                 ended September 30, 1998                                *

27.2             Restated Financial Data Schedule for the fiscal         *
                 years ended September 30, 1997 and 1996

------------------------

*        Filed herewith.

**       Confidential  treatment  has been  granted to certain  portions of this
         exhibit, which portions have been deleted and filed separately with the
         Securities and Exchange Commission.

Unless another exhibit number is indicated as the exhibit number for the exhibit
as "originally filed," the exhibit number in the filing in which any exhibit was
originally  filed  and to  which  reference  is made  hereby  is the same as the
exhibit number assigned herein to the exhibit.

(1)      Incorporated by reference to the indicated  exhibit filed with  Covol's
         Registration Statement on Form 10, filed February 26, 1996.

(2)      Incorporated  by reference to the indicated  exhibit filed with Covol's
         Registration  Statement on Form 10/A,  Amendment No. 2, dated April 24,
         1996.

(3)      Incorporated by reference to the indicated  exhibit filed  with Covol's
         Annual  Report on Form 10-K for the  fiscal  year ended  September  30,
         1996.

(4)      Incorporated by reference  to the indicated exhibit  filed with Covol's
         Current Report on Form 8-K, dated March 10, 1997.

(5)      Incorporated by reference to the  indicated exhibit filed with  Covol's
         Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
         1997.

(6)      Incorporated by reference to the indicated  exhibit filed with  Covol's
         Quarterly  Report on Form 10-Q, for the quarterly period ended June 30,
         1997.

                                       40
<PAGE>


(7)      Incorporated by reference to the  indicated exhibit  filed with Covol's
         Current Report on Form 8-K, dated August 19, 1997.

(8)      Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current Report on Form 8-K, for event dated  September 18, 1997,  filed
         October 28, 1997.

(9)      Incorporated by reference to the indicated  exhibit filed  with Covol's
         Annual  Report on Form 10-K for the  fiscal  year ended  September  30,
         1997.

(10)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current Report on Form 8-K, for event dated March 3, 1998,  filed March
         23, 1998.

(11)     Incorporated by  reference to the indicated exhibit  filed with Covol's
         Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
         1998.

(12)     Incorporated by reference to the  indicated exhibit  filed with Covol's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.

Reports on Form 8-K

         No reports on Form 8-K were filed  during the quarter  ended  September
30, 1998.

Exhibits

         The  response  to this  portion of Item 14 is  submitted  as a separate
section of this report. See Item 14 (a) (3) above.

Financial Statement Schedules

         The  response  to this  portion of Item 14 is  submitted  as a separate
section of this report. See Item 14 (a) (2) above.



                                       41
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.


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


                               By:/s/ Steven G. Stewart   
                                  Steven G. Stewart, Principal Financial Officer

                               Date: January 13, 1999

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


   SIGNATURE                      TITLE                              DATE

/s/ Brent M. Cook            Chief Executive Officer           January 13, 1999
-----------------------  Principal Executive Officer) and      
Brent M. Cook                       Director

/s/ Steven G. Stewart   Chief Financial Officer (principal     January 13, 1999
-----------------------      Financial and Accounting          
Steven G. Stewart                    Officer)

/s/ Stanley M. Kimball        President and Director           January 13, 1999
-------------------------
Stanley M. Kimball

/s/ DeLance W. Squire                Director                  January 13, 1999
-------------------------
DeLance W. Squire

/s/ James A. Herickhoff              Director                  January 13, 1999
-------------------------
James A. Herickhoff

/s/ Raymond J. Weller                Director                  January 13, 1999
-------------------------
Raymond J. Weller

/s/ John P. Hill, Jr.                Director                  January 13, 1999
-------------------------
John P. Hill, Jr.

                                       42
<PAGE>

                    
                        Report of Independent Accountants


To the Board of Directors
Covol Technologies, Inc. and Subsidiaries

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of  operations,  stockholders'  equity,  and cash flows
present fairly, in all material respects, the consolidated financial position of
Covol  Technologies,  Inc. and Subsidiaries  (the "Company") as of September 30,
1998 and 1997, and the  consolidated  results of their operations and their cash
flows for the years ended  September 30, 1998, 1997 and 1996, in conformity with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.




PRICEWATERHOUSECOOPERS LLP


Salt Lake City, Utah
December 22, 1998

                                      F-1
<PAGE>
<TABLE>
<CAPTION>





                                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED BALANCE SHEETS


                                                                                         As of September 30,
(thousands of dollars)                                                                  1998            1997
----------------------------------------------------------------------------------- -------------- ----------------

ASSETS

Current assets:
<S>                                                                                         <C>             <C>   
     Cash and cash equivalents                                                              $ 727           $4,780
     Receivables                                                                            2,879               13
     Receivable - stock subscriptions                                                         ---              577
     Due from related party                                                                 1,012              509
     Inventories                                                                            1,645            1,819
     Advances on inventories                                                                2,522            1,087
     Notes receivable - related parties, current                                              229              276
     Facilities held for sale                                                              28,405            8,155
     Prepaid expenses and other current assets                                                682               52
                                                                                    -------------- ----------------
            Total current assets                                                           38,101           17,268
                                                                                    -------------- ----------------

Property, plant and equipment, net of accumulated depreciation                             14,902            5,464
                                                                                    -------------- ----------------

Other assets:
     Restricted investments                                                                   748              ---
     Note and accrued interest receivable, non-current                                      6,986              ---
     Notes receivable - related parties, non-current                                        2,869            3,817
     Investment in licensee facility                                                        1,000              ---
     Intangible assets                                                                      3,118              ---
     Deposits and other assets                                                                185              321
                                                                                    -------------- ----------------
            Total other assets                                                             14,906            4,138
                                                                                    -------------- ----------------

            Total assets                                                                  $67,909          $26,870
                                                                                    ============== ================
</TABLE>

                                    continued






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

                                      F-2
<PAGE>
<TABLE>
<CAPTION>



                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      CONSOLIDATED BALANCE SHEETS, continued

                                                                                          As of September 30,
(thousands of dollars and shares)                                                        1998            1997
------------------------------------------------------------------------------------ -------------- ----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
<S>                                                                                         <C>              <C>   
     Accounts payable                                                                       $3,036           $3,013
     Due to related party                                                                    1,609            1,548
     Accrued liabilities                                                                     2,858            2,500
     Notes payable and convertible debentures, current                                      22,049            5,247
                                                                                     -------------- ----------------
            Total current liabilities                                                       29,552           12,308
                                                                                     -------------- ----------------

Long-term liabilities:
     Notes payable and convertible debentures, non-current                                  13,930            2,900
     Notes payable - related parties, non-current                                              147              489
     Accrued interest payable, non-current                                                     566              204
     Deferred revenues from advance license fees                                             1,400            1,650
     Deferred compensation                                                                     236              224
                                                                                     -------------- ----------------
            Total long-term liabilities                                                     16,279            5,467
                                                                                     -------------- ----------------
            Total liabilities                                                               45,831           17,775
                                                                                     -------------- ----------------

Minority interest in consolidated subsidiaries                                                 507            3,166
                                                                                     -------------- ----------------

Commitments and contingencies

Stockholders' equity:
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
      issued and  outstanding 316 shares at September 30, 1998 and 303 shares at
      September 30, 1997 (aggregate liquidation preference of $5,465
      at September 30, 1998)                                                                     1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and
      outstanding 11,272 shares at September 30, 1998 and 8,627 shares at
      September 30, 1997                                                                        11                9
     Common stock to be issued, 0 shares at September 30, 1998 and 462 shares at
      September 30, 1997                                                                       ---                1
     Capital in excess of par value - preferred                                              5,184            5,094
     Capital in excess of par value - common                                                64,100           41,818
     Capital in excess of par value - common stock to be issued                                ---            3,291
     Accumulated deficit                                                                   (36,177)         (32,191)
     Notes and interest receivable -- related parties, from issuance of, or
    collateralized      by, common stock, net of allowance                                  (7,773)          (7,411)
     Deferred compensation from stock options                                               (3,775)          (4,683)
                                                                                     -------------- ----------------
            Total stockholders' equity                                                      21,571            5,929
                                                                                     -------------- ----------------

            Total liabilities and stockholders' equity                                     $67,909          $26,870
                                                                                     ============== ================
</TABLE>

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

                                      F-3

<PAGE>
<TABLE>
<CAPTION>


                                         COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                     Year ended September 30,
(thousands of dollars and shares, except per-share data)                    1998              1997               1996
--------------------------------------------------------------------- ----------------- ------------------ ------------------
Revenues:
<S>                                                                             <C>                <C>                <C>   
     License fees                                                               $7,942             $  ---             $  100
     Binder and coal fine sales - related party                                  2,543                209                ---
     Binder sales                                                                  994                ---                ---
     Binder plant sales                                                          1,088                ---                ---
     Synthetic fuel sales, net                                                      32                 42                195
     Other                                                                         100                ---                ---
                                                                      ----------------- ------------------ ------------------
               Total revenues                                                   12,699                251                295
                                                                      ----------------- ------------------ ------------------

Operating costs and expenses:
     Cost of coal briquetting operations                                         9,295              4,803                860
     Selling, general and administrative                                         4,436              2,998              3,796
     Research and development                                                      422                664              1,044
     Compensation expense on stock options, stock warrants and
          issuance of common stock                                                 939              2,058              4,873
     Loss on sale of facility                                                      218                582                ---
                                                                      ----------------- ------------------ ------------------
        Total operating costs and expenses                                      15,310             11,105             10,573
                                                                      ----------------- ------------------ ------------------
Operating loss                                                                  (2,611)           (10,854)           (10,278)
                                                                      ----------------- ------------------ ------------------

Other income (expense):
     Interest income                                                               899                286                302
     Interest expense                                                           (2,745)            (1,645)               (94)
     Minority interest in net losses of consolidated subsidiaries                  392              1,245                  4
   Write-up (write-down) of notes receivable - related parties,
        collateralized by common stock                                              19                (60)            (2,700)
     Other                                                                          60                 33               (166)
                                                                      ----------------- ------------------ ------------------
          Total other income (expense)                                          (1,375)              (141)            (2,654)
                                                                      ----------------- ------------------ ------------------
Loss from continuing operations before income taxes                             (3,986)           (10,995)           (12,932)

Income tax provision                                                               ---                ---                (23)
                                                                      ----------------- ------------------ ------------------
Loss from continuing operations                                                 (3,986)           (10,995)           (12,955)
                                                                      ----------------- ------------------ ------------------

Discontinued operations (Note 15):
     Loss from discontinued operations                                             ---                ---               (590)
     Loss on disposal of discontinued operations                                   ---                ---               (291)
                                                                      ----------------- ------------------ ------------------
        Loss from discontinued operations                                          ---                ---               (881)
                                                                      ================= ================== ==================
Net loss                                                                       $(3,986)          $(10,995)          $(13,836)
                                                                      ================= ================== ==================

Basic and diluted net loss per common share:
   Loss per share from continuing operations                                     $(.43)            $(1.38)            $(1.86)
     Loss per share from discontinued operations                                   ---                ---               (.13)
                                                                      ----------------- ------------------ ------------------
Basic and diluted net loss per common share                                      $(.43)            $(1.38)            $(1.99)
                                                                      ================= ================== ==================
</TABLE>


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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                                                                               Notes and   
                                                                                                                interest  
                                                                                                               receivable  
                                                                                                                -related   
                                                                                                                parties,   
                                                                                                                  from     
                                                                                                                issuance   
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   Shares  Amount  par value Shares  Amount  par value  Shares  Amount  par value  deficit   stock      options
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------
<S>                   <C>     <C>      <C>     <C>       <C>    <C>         <C>     <C>     <C>      <C>        <C>       <C>     
Balances 
at 
October 1, 1995        ---     $---     $---    5,260     $6     $9,617      119     $1      $582     $(7,360)   $(240)    $(1,422)

Common stock 
issued for 
services                                          114     ---       769      (50)    ---     (322)

Common stock 
issued for 
notes receivable
from related 
parties, 
including 
exercise of 
stock options                                   1,010      1      6,283                                         (6,284)

Common stock 
issued for 
cash, including
exercise of 
stock options
and warrants                                    1,226      1      7,479      (69)    ---   (260)

Common stock 
to be issued 
for cash 
received                                                                      44     ---    350

Common stock
to be issued 
for property 
acquired                                                                      60     ---    585

Payment on 
notes receivable 
- related                                                                                                          171
parties

Issuance of notes 
receivable - 
related parties,  
collateralized  
by common stock
(net of $2,700 
write-down and
$650 imputed                                                                                                    (1,650)
interest)

Services received 
in lieu of 
payments on
notes receivable 
- related parties                                                                                                  688

Compensation 
expense related 
to the
issuance of 
stock options 
at below 
market value                                                      3,863
value

Deferred  
compensation  
related to the 
issuance of 
stock options 
at below market
value to officers, 
directors, 
employees and 
consultants, net of
cancellations                                                     4,668                                                     (4,668)
</TABLE>



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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and 
                                                                                                                interest 
                                                                                                               receivable
                                                                                                                -related 
                                                                                                                parties, 
                                                                                                                  from   
                                                                                                                issuance 
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   Shares  Amount  par value Shares  Amount  par value  Shares  Amount  par value  deficit   stock      options
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------
<S>                   <C>     <C>      <C>     <C>       <C>    <C>         <C>     <C>     <C>      <C>        <C>       <C>     
Amortization of 
deferred 
compensation from
stock options                                                                                                                  910

Interest earned 
on notes receivable 
- related parties                                                                                                 (265)


Compensation 
expense related 
to the issuance 
of stock for 
services at below
market value                                                        101


Net loss for 
the year ended 
September 30, 1996                                                                                    (13,836)
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1996     ---      ---      ---    7,610      8     32,780      104      1       935     (21,196)  (7,580)     (5,180)
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Common stock 
issued for cash 
received in
the prior period                                  104    ---        935     (104)    (1)     (935)

Common stock 
issued for cash, 
including
exercise of stock 
options and warrants                              603      1      2,773

Deferred compensation 
related to the
issuance of stock 
options at below 
market value to 
officers, directors 
and employees                                                     1,178                                                     (1,178)

Common stock 
issued for services                                98    ---        789

Inducement related 
to conversion of notes
payable into common stock                                           323

Common stock issued 
to repay note payable 
- related parties                                  21    ---        136
</TABLE>



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

                                      F-6

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and  
                                                                                                                interest  
                                                                                                               receivable 
                                                                                                                -related  
                                                                                                                parties,  
                                                                                                                  from    
                                                                                                                issuance  
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   Shares  Amount  par value Shares  Amount  par value  Shares  Amount  par value  deficit   stock      options
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------
<S>                   <C>     <C>      <C>     <C>       <C>    <C>         <C>     <C>     <C>      <C>        <C>       <C>     
Common stock issued 
on conversion of note                             141    ---      1,125
payable

Common stock issued 
under a subscription                               50    ---        350
agreement for cash 
received in 
October 1997

Common stock to be 
issued for cash 
received
in the current 
period, including 
exercise                                                                     400      1     2,798

Common stock to 
be issued for 
distribution                                                                  30     --       266
rights

Common stock to 
be issued under
subscription 
agreements for 
cash received                                                                 32    ---       227
in October 1997

Amortization of 
deferred 
compensation from                                                                                                            1,675
stock options

Interest expense 
related to issuance 
of convertible 
debt at a discount                                                1,429

Payment on notes 
receivable - related                                                                                               109
parties

Write-down of notes 
receivable - related                                                                                                60
parties

Preferred stock 
issued for cash, net 
of offering costs      303        1    5,094

Net loss for the 
year ended 
September 30, 1997                                                                                    (10,995)
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1997     303        1    5,094    8,627      9     41,818      462      1     3,291     (32,191)  (7,411)     (4,683)
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Common stock issued 
for cash received in
the previous period                                                          462     --     3,291        (462)      (1)     (3,291)

Common stock issued 
to purchase minority
interests in subsidiaries                                                    540      1     5,383
</TABLE>


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

                                      F-7

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued
                                                                                                               Notes and  
                                                                                                                interest  
                                                                                                               receivable 
                                                                                                                -related  
                                                                                                                parties,  
                                                                                                                  from    
                                                                                                                issuance  
                     Convertible Preferred Stock        Common Stock        Common Stock to be Issued            of, or    Deferred
                     ---------------------------- ------------------------  -------------------------           collater-   compen-
                                       Capital in                Capital in                Capital in  Accum-    alized     sation
(thousands of                          excess of                 excess of                 excess of   lated  by, common  from stock
dollars and shares)   Shares  Amount  par value Shares  Amount  par value  Shares  Amount  par value  deficit   stock      options
-------------------  -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------
<S>                   <C>     <C>      <C>     <C>       <C>    <C>         <C>     <C>     <C>      <C>        <C>       <C>     
Common stock issued 
for cash, including
exercise of stock 
options                                           533    ---      3,257

Preferred stock 
issued for cash, 
net of offering 
costs                   13      ---       90

Common stock 
issued on 
conversion of 
notes payable 
and accrued 
interest to 
common stock                                    1,107      1      8,178

Interest expense 
related to 
issuance of
convertible debt 
at a discount                                                     2,046

Payment received 
on notes receivable --                                                                                             329
related parties

Amortization of 
deferred 
compensation from
stock options                                                                                                                  908

Write-up of 
notes receivable 
-- related                                                                                                         (19)
parties

Compensation expense 
related to issuance 
of stock options 
for services                                        3     --        127

Reclassification 
of notes receivable 
- related parties                                                                                                 (672)

Net loss for the 
year ended 
September 30, 1998                                                                                     (3,986)
                     -------  ------  --------- ------  ------  ---------  ------  ------  ---------  ------- ---------   ---------

Balances at 
September 30, 1998     316       $1   $5,184   11,272    $11    $64,100        0     $0        $0    $(36,177)  (7,773)    $(3,775)
                     =======  ======  ======== ======   =====   ========  ======   =====   ========  ========  =======   ==========
                    
</TABLE>


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

                                      F-8
<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                     Year ended September 30,
(thousands of dollars)                                                                            1998        1997         1996
---------------------------------------------------------------------------------------------- ----------- ------------ ------------
Cash flows from operating activities:
<S>                                                                                               <C>         <C>          <C>      
Net loss                                                                                          $(3,986)    $(10,995)    $(13,836)
     Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation and amortization                                                               607          193          187
          Losses applicable to minority interests in subsidiaries                                    (392)      (1,245)          (4)
          Loss on disposal of discontinued operations                                                 ---          ---          291
          Deferred income taxes                                                                       ---          ---           23
          Loss on sale of facility                                                                    218          582          ---
          Interest expense related to issuance of convertible debt at a discount                    2,046        1,429          ---
          Amortization of deferred compensation and compensation expense on stock options             908        1,675        4,773
          Common stock issued or to be issued for services and distribution rights, and
            compensation expense related to stock options                                             127        1,055          547
          Write-down (write-up) of notes receivable - related parties                                 (19)          60        2,700
          Inducement expense related to conversion of notes payable into common stock                 ---          323          ---
          Services received in lieu of payments on notes receivable issued for common stock           ---          ---          687
          Interest earned on notes receivable - related parties                                       ---          ---         (265)
          Notes payable issued for services                                                           ---          ---          160

     Increase (decrease) from changes in assets and liabilities,  net of effects
     from investing and financing activities:
           Receivables                                                                             (2,866)          65          (55)
           Due from related party                                                                    (503)        (509)         ---
           Inventories                                                                                174          (61)        (162)
           Advances on inventories                                                                 (1,435)      (1,087)         ---
           Prepaid expenses and other current assets                                                 (630)          (7)         (32)
           Accrued interest receivable - non-current                                                 (486)         ---          ---
           Deposits and other assets                                                                  136         (121)          24
           Accounts payable                                                                            23       (1,138)       1,436
           Due to related party                                                                        61        1,548          ---
           Accrued liabilities                                                                        851        2,166           47
           Accrued interest payable, non-current                                                      362          204          ---
           Deferred revenues from advance license fees                                               (250)       1,650          ---
           Deferred compensation                                                                       12           11           10
           Discontinued operations non-cash charges and working capital changes                       ---          ---          894
                                                                                               ----------- ------------ ------------
                Net cash used in operating activities                                             (5,042)       (4,202)      (2,575)
                                                                                               ----------- ------------ ------------

     Cash flows from investing activities:
          Purchase of property, plant and equipment and facilities held for sale                  (36,963)      (7,194)      (5,055)
          Investment in licensee facility                                                          (1,000)         ---          ---
          Increase in restricted investments                                                         (748)         ---          ---
          Issuance of notes receivable -- related parties                                             ---          ---         (704)
          Proceeds from notes receivable - related parties                                            323           45          ---
          Increase in cash surrender value of life insurance                                          ---          (32)         (13)
                                                                                               ----------- ------------ ------------
               Net cash used in investing activities                                              (38,388)      (7,181)      (5,772)
                                                                                               ----------- ------------ ------------
</TABLE>

                                    continued

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

                                      F-9

<PAGE>
<TABLE>
<CAPTION>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

                                                                                                  Year ended September 30,
(thousands of dollars)                                                                          1998        1997        1996
-------------------------------------------------------------------------------------------- ----------- ----------- ------------

     Cash flows from financing activities:
<S>                                                                                             <C>          <C>           <C>  
        Proceeds from issuance of notes payable and convertible debentures                      $35,454      $6,070        $ 700
        Payment on notes payable                                                                   (330)     (1,109)        (159)
        Proceeds from issuance of notes payable -- related parties                                  ---         595          ---
        Payment on notes payable -- related parties                                                 ---        (756)      (3,539)
        Proceeds from receivable -- stock subscriptions                                             577         ---          ---
        Proceeds from issuance of common stock, net                                               3,257       5,573        7,570
        Proceeds from issuance of preferred stock, net                                               90       5,095          ---
        Proceeds from notes receivable -- related parties, from issuance of, or
          collateralized by common stock                                                            329         109          171
        Proceeds from issuance of minority interests in subsidiaries                                ---         302        4,385
        Allocation to minority interest limited partners                                            ---        (206)         ---
        Financing activities of discontinued operations                                             ---         ---       (1,582)
                                                                                             ----------- ----------- ------------
         Net cash provided by financing activities                                               39,377      15,673        7,546
                                                                                             ----------- ----------- ------------

     Net increase (decrease) in cash and cash equivalents                                        (4,053)      4,290         (801)

     Cash and cash equivalents, beginning of year                                                 4,780         490        1,291
                                                                                             ----------- ----------- ------------

     Cash and cash equivalents, end of year                                                       $ 727     $ 4,780        $ 490
                                                                                             =========== =========== ============

     Supplemental schedule of non-cash investing and financing activities:
        Common stock issued on conversion of notes payable and accrued interest                  $8,179       $ ---        $ ---
        Note receivable issued for sale of facility                                               6,500       3,500          ---
        Common stock issued for purchase of minority interests in subsidiaries                    5,384         ---          ---
        Note payable issued for inventory                                                           ---       1,595          ---
        Accounts payable for facilities held for sale                                               588       1,968          ---
        Common stock issued for notes receivable                                                    ---         577        6,284
        Common stock issued to repay notes payable and accrued interest -- related party            ---       1,261          ---
        Note payable issued for equipment                                                           ---       1,607          ---
        Distribution to minority limited partners offset against note receivable                    ---          66          ---
        Obligations assumed in connection with sale of subsidiaries                                 ---         ---        4,636
        Note receivable received for subsidiaries (net of imputed interest)                         ---         ---        4,350
        Note payable issued and common stock to be issued to acquire land                           ---         ---          927
        Note payable issued for services                                                            ---         ---          160

     Supplemental  disclosure of cash flow information:  
       Cash paid for interest, net of amounts capitalized:
        Continuing operations                                                                       $49        $208         $111
        Discontinued operations                                                                     ---         ---           98
</TABLE>

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

                                      F-10
<PAGE>



                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                   ----------


1. Summary of Significant Accounting Policies

   Business Organization and Nature of Operations

   Covol Technologies,  Inc. (the Company) was originally incorporated in Nevada
   in 1987 and was  reincorporated  in Delaware  in August  1995.  In 1991,  the
   Company   acquired   a  coal   briquetting   technology   (the   "Briquetting
   Technology").  In 1992, the Company  constructed a pilot briquetting plant in
   Price,  Utah.  During 1993,  the Company  refined the technology to briquette
   waste  by-products  of the steel  manufacturing  industry.  In June 1996, the
   Company formed Utah Synfuel #1 Ltd.  ("Utah Synfuel #1") and Alabama  Synfuel
   #1  Ltd.  ("Alabama  Synfuel  #1"),  each  a  Delaware  limited   partnership
   (collectively  the  "Partnerships").  The Company is both the general partner
   and a limited partner in the Partnerships (see Note 14).

   The Company's primary business is to commercialize the Briquetting Technology
   used to recycle waste  by-products  from the coal and steel industries into a
   marketable  source of fuel and revert  materials.  Through June 30, 1998, the
   Company's  focus was on the  construction  of facilities and the licensing of
   its  Briquetting  Technology to companies that  constructed  facilities  that
   convert coal fines into synthetic fuel briquettes. At September 30, 1998, the
   Company and its  licensees  were  operating 24 of these  facilities  in eight
   states at various levels of production. The four Company-owned facilities are
   expected to be sold in 1999.  The Company has no current  plans to  construct
   additional synthetic fuel facilities.

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

   To  provide   funding  for  the  Company's   operations  and  debt  repayment
   requirements  during early 1999,  the Company will utilize  proceeds from the
   issuance of debt and equity  securities and excess  proceeds from the sale of
   facilities.  During November 1998, the Company issued common stock and common
   stock  warrants for total proceeds of  approximately  $3,500,000 and incurred
   debt totaling $400,000.  The Company has received term sheets for the sale of
   up to $10,000,000 of convertible  preferred stock. This financing is expected
   to close in January 1999.  The Company has received  correspondence  from the
   lender  holding  notes  payable  due March  1999 and June 1999  indicating  a
   willingness  to  extend  the due  dates  for 90 days if so  requested  by the
   Company.  If such a request is made, the Company has agreed to issue warrants
   for the  purchase  of common  stock to the  lender as  consideration  for the
   extension.  The Company  believes the funds raised in this  financing will be
   sufficient to fund the Company's  operations and debt repayment  requirements
   until its operating activities begin producing positive cash flow.

   Construction Businesses

   In 1993 and 1994,  the  Company  acquired  four  construction  companies.  In
   September  1995,  the  Company's  Board  of  Directors  approved  a  plan  to
   discontinue the Company's construction businesses,  which were sold effective
   February 1, 1996. (See Note 15, "Discontinued Operations").

   Principles of Consolidation

   The 1996  consolidated  financial  statements  include  the  accounts  of the
   Company and its 100% owned construction company subsidiaries,  until the time
   of their sale in February 1996. The consolidated financial statements for all
   years  presented  include the  accounts  of the Company and its two  majority
   owned  subsidiaries,  Utah  Synfuel #1 and  Alabama  Synfuel  #1,  from their
   inception in 1996. All significant intercompany transactions and accounts are
   eliminated in consolidation.


                                      F-11

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


1. Summary of Significant Accounting Policies, continued

   Principles of Consolidation, continued

   During 1997, the Company  became a 1% general  partner of Coaltech No. 1 L.P.
   ("Coaltech"),  a  Delaware  limited  partnership,  for  $10.  Based  upon the
   Company's lack of effective  control over Coaltech and the limited  partners'
   financial  responsibility  for its  operations,  the Company's  investment in
   Coaltech  is  accounted  for  using the  equity  method  of  accounting  with
   proportional elimination of intercompany revenues and expenses.

   Stock Split 

   The Company implemented a two-for-one stock split effective January 23, 1996.
   All  information  set forth  herein has been  adjusted to give effect to this
   stock split.

   Revenue and Cost Recognition  

   Revenues from the licensing of the Company's technology are recognized in the
   period when earned.  Advance  license fees are earned when certain  synthetic
   fuel facility  construction  milestones  are met or when the  facilities  are
   certified  operational  for their  intended  use.  Advance  license fees that
   require  the  Company  to render  services  in the future  are  deferred  and
   recognized  when its  obligations  are met.  Earned  license  fees or royalty
   payments are recognized in the period  synthetic fuel is produced and sold by
   licensees. $3,336,000 of license fees in 1998 were from a single licensee and
   $1,500,000  were  from a  second  licensee.  Revenues  from  the sale of coal
   briquettes are  recognized as product is shipped.  Collateral is not required
   for receivables and allowances are provided for uncollectible accounts.

   Cash and Cash Equivalents 

   The Company  considers  all highly liquid debt  instruments  with an original
   maturity  of  three  months  or less to be cash  equivalents.  Cash  and cash
   equivalents are deposited with financial institutions located in Utah.

   Restricted Investments

   Restricted  investments  consist  primarily of highly liquid interest bearing
   deposits held as collateral for certain Company obligations.

   Inventories 

   Inventories  are stated at the lower of cost or market  with cost  determined
   using an average cost method, and consist primarily of coal fines,  available
   for sale.  Covol has a lease  arrangement  that provides for the purchase and
   removal  of coal  fines  which are used as  feedstock  for a  synthetic  fuel
   facility.  Payments made under the lease  arrangement prior to removal of the
   coal fines are recorded as advances on inventories (see Note 2).

   Facilities Held for Sale

   Facilities held for sale consist of four synthetic fuel  facilities,  and are
   stated at the lower of cost or estimated net realizable value. The facilities
   were  constructed  to be sold to licensees of the Company's  technology at or
   slightly  above their cost.  Two of the four  facilities are under option for
   purchase by the  licensees of those  facilities,  and the Company is actively
   pursuing the sale of all four facilities.  The Company anticipates completing
   the sale of these  facilities in 1999. The Company  recognizes a gain or loss
   on facilities  held for sale when the sale is  consummated.  The gain or loss
   represents the difference  between the carrying value and the sales price and
   is reflected as a component of operating costs and expenses.

                                      F-12

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------



1. Summary of Significant Accounting Policies, continued

   Property, Plant and Equipment

   Property,  plant and  equipment  is recorded at cost,  including  interest on
   funds borrowed during the construction  period,  and is depreciated using the
   straight-line method over its estimated useful life. Maintenance, repairs and
   minor  replacements  are  charged to expense  as  incurred.  Upon the sale or
   retirement of property,  plant and equipment, any gain or loss on disposition
   is reflected in the  statement of  operations  and the related asset cost and
   accumulated depreciation are removed from the respective accounts.

   Intangible Assets

   Intangible  assets  consist of the  excess of the value of the  consideration
   paid for the purchase of certain limited partners'  interests in subsidiaries
   over the fair values of the related  assets,  which fair values  approximated
   their  carrying  cost  (see  Note  14).  They  are  being  amortized  on  the
   straight-line method over approximately ten years.

   Valuation of Long-Lived Assets 

   The Company  periodically  evaluates the carrying value of long-lived assets,
   including  intangible  assets,  when events and circumstances  warrant such a
   review. The carrying value of a long-lived asset is considered  impaired when
   the  anticipated  cumulative  undiscounted  cash flow from that asset is less
   than its carrying  value.  In that event,  a loss is recognized  based on the
   amount by which the  carrying  value  exceeds  the fair  market  value of the
   long-lived  asset. No  impairment-related  losses have been recognized in the
   Company's financial statements for any period presented.

   Common Stock Issued for Services

   Common stock issued for services is accounted for using the fair value of the
   shares of common stock, determined at the time the shares are issued.

   Loss per Share Calculation 

   In 1998, the Company adopted Statement of Financial  Accounting Standards No.
   128 "Earnings per Share" ("SFAS 128").  SFAS 128 replaced the  calculation of
   primary and fully diluted  earnings per share with basic and diluted earnings
   per share.  Unlike  primary  earnings  per share,  basic  earnings  per share
   excludes  any  dilutive   effects  of  options,   warrants  and   convertible
   securities.  Diluted  earnings  per share is  similar to the  previous  fully
   diluted earnings per share.  Loss per share amounts for all periods presented
   conform to SFAS 128 requirements and no restatements were necessary (see Note
   9).

   For all periods presented,  options,  warrants and convertible securities (as
   disclosed in Notes 7 and 13) were not included in the calculation of loss per
   share because the effect would have been antidilutive.

   Use of Estimates

   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.

                                      F-13

<PAGE>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

1. Summary of Significant Accounting Policies, continued

   Reclassifications

   Certain prior year amounts have been reclassified to conform with the current
   year's  presentation.  These  reclassifications  had no effect on net loss or
   total assets.

2. Advances on Inventories

   During 1997, the Company entered into an agreement to purchase coal fines and
   made  payments  totaling  approximately  $1,146,000,  of  which  $59,000  was
   transferred to cost of coal briquetting  operations.  During 1998, additional
   payments totaling  approximately  $1,583,000 were made, of which $148,000 was
   transferred to cost of coal briquetting  operations.  The net amount paid has
   been recorded as advances on inventories.  The Company expects to utilize the
   majority  of these coal fines  during  1999,  at which time the costs will be
   expensed.

   Under the  agreement,  the Company 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.  Due From/To Related Party

   Due from  related  party  consists of amounts  receivable  from  Coaltech for
   operating  expenses in 1998 and for operating  expenses and interest in 1997.
   Due to related party  represents  amounts due to Coaltech for the purchase of
   synthetic fuel briquettes.

4.   Notes Receivable
<TABLE>
<CAPTION>

   Notes receivable consist of the following at September 30:

   (thousands of dollars)                                                                             1998           1997
   ---------------------------------------------------------------------------------------------- -------------- --------------

   Notes and Accrued Interest Receivable, non-current

<S>                                                                                               <C>           <C>
   Note receivable from a corporation,  bearing interest at 12%,  principal  and
   interest due February 2003,  collateralized by a synthetic  fuel facility  in
   Alabama, which was sold by the Company.                                                               $6,500           $---
   

   Accrued interest receivable                                                                              486            ---
                                                                                                  -------------- --------------
      Note and interest receivable                                                                       $6,986           $---
                                                                                                  ============== ==============

   Notes Receivable - Related Parties

   Note  receivable  from  Coaltech,  bearing  interest at 9.7%,  principal  and
   interest payments of $130 due quarterly through December 2007, collateralized
   by a synthetic fuel facility in  Utah, which was sold by the Company.                                 $3,098         $3,421

   Notes  receivable  from seven  officers of the Company,  bearing  interest at
   prime (8.5% at September 30, 1997) plus 2%, principal and interest due August
   2000,  originally  collateralized by interests in Utah Synfuel #1 and Alabama
   Synfuel #1. Reclassified  in  1998  as  notes receivable -  related  parties,
   collateralized by  common stock.  No interest income  was recognized  in 1998
   or 1997.                                                                                                ---             672
   
                                                                                                  -------------- --------------
                                                                                                          3,098          4,093
   Less current portion                                                                                     229            276
                                                                                                  -------------- --------------
      Notes receivable - related parties                                                                 $2,869         $3,817
                                                                                                  ============== ==============
</TABLE>

                                      F-14
<PAGE>
<TABLE>
<CAPTION>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

5. Property, Plant and Equipment

   Property, plant and equipment consists of the following at September 30:

  (thousands of dollars)                                            Range of estimated useful         1998           1997
                                                                              lives
  --------------------------------------------------------------- ------------------------------- -------------- --------------
<S>                                                                      <C>                                 <C>            <C>  
  Land                                                                                                    $ 153          $ ---
  Buildings and improvements                                              10 - 20 years                  11,154            260
  Machinery and equipment                                                  5 - 10 years                   4,749          2,102
  Construction in progress                                                                                  ---          3,698
                                                                                                  -------------- --------------
                                                                                                         16,056          6,060
   Less accumulated depreciation                                                                          1,154            596
                                                                                                  ============== ==============
   Net property, plant and equipment                                                                    $14,902         $5,464
                                                                                                  ============== ==============
</TABLE>

   Depreciation  expense was $557,000 in 1998,  $193,000 in 1997 and $187,000 in
1996.

6.  Investment in Licensee Facility

   Investment in licensee facility represents payments made to the licensee of a
   synthetic  fuel  facility  located  in  Pennsylvania  in  exchange  for a 10%
   interest in the net cash flows from operation of the facility. The investment
   is being  accounted  for at cost.  Cash received by the Company will first be
   applied as a reduction of the carrying amount of the investment.

7. Long-term Liabilities
<TABLE>
<CAPTION>

   Notes Payable and Convertible Debentures

   Notes  payable  and  convertible  debentures  consist  of  the  following  at
   September 30:

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

<S>                                                                                                    <C>           <C>
  Note payable to a corporation bearing interest at prime  (8.25% at September 30, 1998) plus 2%,
  collateralized by plant and equipment, principal and interest due December                             $ 2,900       $ 2,900
  1999.

  Note payable to a corporation bearing interest at 6%, principal and interest due October 1999,
  collateralized by a coal wash plant in Utah.                                                             4,263           945

  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. Subsequent to September 30, 1998, this
  entity modified the terms of the note and agreed to loan to the Company additional amounts up
  to $1,500.  This entity has an option to purchase the facility.  If it is not purchased, the
  Company has agreed to pay interest on all outstanding amounts at a rate of 10%, payable monthly
  beginning January 1999 through June 1999.  Beginning July 1999 through May 2000, monthly
  payments of $350 will be required, with all unpaid principal and interest due June 2000.  Also,
  subsequent to September 30, 1998 the Company granted additional collateral to the corporation            8,242            --
  in the form of certain license fees receivable by the Company from other synthetic fuel
  facilities.

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

                                      F-15
<PAGE>
<TABLE>
<CAPTION>


                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

7. Long-term Liabilities, continued

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

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

  Note payable to a corporation  bearing  interest at 18% until October 1998, at
  which time it increased to 22%, due June 1999,  collateralized by a promissory
  note  receivable and by certain future license fees receivable by the Company.
  Warrants to purchase  100,000  shares of common  stock were granted in October
  1998 based on the outstanding principal balance. A member of the
  Company's Board of Directors is affiliated with this corporation.                                        4,000           ---

  Note payable to a corporation, bearing interest at 13% until December 1998, at
  which time it increases to 14%. Principal and accrued interest due March 1999,
  collateralized  by certain  future license fees  receivable  by  the  Company.
  A member of  the  Company's  Board  of  Directors  is  affiliated   with  this
  corporation.                                                                                             4,000           ---
  

  Convertible note payable to a  corporation bearing  interest at prime plus 2%.  Principal of
  $6,686 plus accrued interest of $314 was converted to common stock at $7.00 per share in March             ---         3,302
  1998.

  Convertible debenture payable to two individuals and one trust bearing interest at prime plus
  2%.  Converted to common stock at $11.00 per share in June 1998.                                           ---         1,000

  Other                                                                                                       94           ---
                                                                                                    ------------- -------------
                                                                                                          35,979         8,147
       Less: current portion                                                                              22,049         5,247
                                                                                                    ============= =============
       Total non-current                                                                                 $13,930        $2,900
                                                                                                    ============= =============
</TABLE>

   Substantially  all  of  the  Company's  property,  plant  and  equipment  and
   facilities  held for sale are collateral for the notes payable.  The weighted
   average interest rate on notes payable and convertible debentures was 8.5% at
   September  30, 1998 and 10.5% at September  30, 1997.  Future  maturities  of
   notes payable at September 30, 1998 are as follows:
<TABLE>
<CAPTION>

                                                              Year ending September 30,      (thousands of
                                                                                                dollars)
                                                              --------------------------- ---------------------
<S>                                                                      <C>                           <C>    
                                                                         1999                          $22,049
                                                                         2000                            7,173
                                                                         2001                            6,757
                                                                                          =====================
                                                                        Total                          $35,979
                                                                                          =====================
</TABLE>

   Notes Payable - Related Parties, Non-current

   Notes  payable - related  parties  represents  unsecured  amounts  due to two
   officers of the Company  which bear interest at prime (8.25% at September 30,
   1998) plus 2%. Principal and interest are due November 2002.

   Deferred Compensation

   In 1993, the Company assumed a liability to pay a current  stockholder of the
   Company $40,000 per year for seven years beginning February 1999. The present
   value of this  liability,  discounted  at  approximately  5%, is reflected as
   deferred compensation in the consolidated balance sheet.

                                      F-16
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

7. Long-term Liabilities, continued

   Interest Costs  

   During 1998,  the Company  incurred  total  interest  costs of  approximately
   $4,266,000 (including  approximately  $2,046,000 of non-cash interest expense
   resulting  from  issuance  of  convertible  debt  at a  discount),  of  which
   approximately  $1,521,000 was capitalized.  During 1997, the Company incurred
   total interest costs of  approximately  $2,023,000  (including  approximately
   $1,429,000  of  non-cash   interest   expense   resulting  from  issuance  of
   convertible  debt  at  a  discount),  of  which  approximately  $378,000  was
   capitalized.  During  1996,  the Company  incurred  total  interest  costs of
   approximately $94,000, of which approximately $33,000 was capitalized.

8. Income Taxes

   The Company accounts for income taxes using the asset and liability  approach
   in accordance  with Statement of Financial  Accounting  Standards  (SFAS) No.
   109,  "Accounting  for Income Taxes".  The Company files a  consolidated  tax
   return  with  its  100%  owned  subsidiaries.   Both  majority-owned  limited
   partnerships file separate tax returns, as required.

   As of September 30, 1998, the Company has net operating loss carryforwards of
   approximately  $21,400,000 which can be used to offset future taxable income.
   The net operating  loss  carryforwards  expire from 2005 to 2018. The Company
   also has  approximately  $190,000  in  research  and  development  tax credit
   carryforwards  which can be used to offset  future tax  liabilities.  The tax
   credit  carryforwards  expire  from 2007 to 2013.  The  utilization  of these
   carryforwards  against  future taxable income may become subject to an annual
   limitation due to changes in ownership of the Company's common stock.

   The provision for income taxes from continuing operations for the years ended
   September 30, 1998,  1997 and 1996, all of which  represents  deferred income
   taxes,  differs  from  the  statutory  federal  income  tax  rate  due to the
   following:
<TABLE>
<CAPTION>

  (thousands of dollars)                                                           1998            1997           1996
  --------------------------------------------------------------------------- --------------- --------------- --------------
<S>                                                                                   <C>            <C>             <C>   
  Tax benefit at statutory rates                                                      $1,355         $ 3,738         $3,810
  Change in valuation allowance                                                       (1,377)         (3,840)        (4,007)
  State income taxes, net of federal tax effect                                           39             101            363
  Other, including redetermination of prior years' tax estimates                         (17)              1           (189)
                                                                              --------------- --------------- --------------
     Deferred federal income tax provision                                              $  0            $  0         $  (23)
                                                                              =============== =============== ==============
<CAPTION>

   The  components  of the net deferred  tax asset as of September  30, 1998 and
1997 are as follows:

  (thousands of dollars)                                                                          1998            1997
  ------------------------------------------------------------------------------------------- -------------- ---------------

  Deferred tax assets (liabilities):
<S>                                                                                                  <C>            <C>    
     Net operating loss carryforwards                                                                $7,995         $ 6,282
     Research and development tax credit carryforwards                                                  189             189
     Compensation expense related to common stock options                                             2,084           2,003
     License fee revenue recognition                                                                    315             104
     Write-down of notes receivable                                                                     304             712
     Estimated liabilities                                                                              356             551
     Depreciation                                                                                       (88)           (111)
     Other                                                                                               40              88
                                                                                              -------------- ---------------
          Total deferred tax assets                                                                  11,195           9,818
     Valuation allowance                                                                            (11,195)         (9,818)
                                                                                              -------------- ---------------
          Net deferred tax asset                                                                      $   0           $   0
                                                                                              ============== ===============
</TABLE>

                                      F-17

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

8. Income Taxes, continued

   The valuation allowance increased by $1,377,000 during 1998, representing the
   additional amount of deferred tax assets at September 30, 1998 not considered
   recoverable  through the reversal of taxable  temporary  differences,  or the
   generation of future taxable  income.  The valuation  allowance  increased by
   $3,840,000  during 1997 and by $4,007,000  during 1996. SFAS No. 109 requires
   that a  valuation  allowance  be  provided if it is more likely than not that
   some  portion  or all of a  deferred  tax  asset  will not be  realized.  The
   Company's  ability to realize  the  benefit of its  deferred  tax assets will
   depend on the  generation of future  taxable  income  through its  continuing
   operations  or  through  the sale of  assets.  Because  the  Company  has not
   generated   significant   revenues  to  date  relating  to  the   Briquetting
   Technology,  the Company  believes that a valuation  allowance of $11,195,000
   should be provided as of September 30, 1998.  This estimate may change in the
   near term depending on the level of earned license fees received in 1999.

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

  (thousands of dollars and shares, except per-share data)                         1998             1997            1996
  --------------------------------------------------------------------------- ---------------- --------------- ---------------
  Numerator:
<S>                                                                                  <C>            <C>             <C>      
     Loss from continuing operations                                                 $(3,986)       $(10,995)       $(12,955)
     Loss from discontinued operations                                                    ---             ---           (881)
                                                                              ---------------- --------------- ---------------
     Net loss                                                                         (3,986)        (10,995)        (13,836)
     Preferred stock dividends                                                          (337)           (189)             ---
                                                                              ================ =============== ===============
     Net loss attributable to common stockholders                                    $(4,323)       $(11,184)       $(13,836)
                                                                              ================ =============== ===============

  Denominator - weighted average shares outstanding                                     9,969           8,080           6,941
                                                                              ================ =============== ===============

  Loss per share from continuing operations                                            $(.43)         $(1.38)         $(1.86)
  Loss per share from discontinued operations                                             ---             ---           (.13)
                                                                              ================ =============== ===============
  Basic and diluted net loss per share                                                 $(.43)         $(1.38)         $(1.99)
                                                                              ================ =============== ===============
<CAPTION>

   For 1998 and 1997, the Company's  loss per common share was determined  after
   taking into  account  undeclared  cumulative  preferred  stock  dividends  of
   $337,000 and $24,000,  respectively  and, in 1997  approximately  $165,000 of
   preferred  stock  dividends  imputed  based  upon the price of the  Company's
   common stock at the date the convertible preferred shares were issued.

10. Notes and Interest Receivable -- Related Parties, Collateralized by Common Stock
    --------------------------------------------------------------------------------

   Notes and interest  receivable -- related parties,  collateralized  by common
   stock, consist of the following at September 30:

   (thousands of dollars and shares)                                                                  1998          1997
   ---------------------------------------------------------------------------------------------- ------------- --------------
<S>                                                                                               <C>             <C>
   Note receivable from a shareholder,  $5,000 face amount,  bearing interest at
   6%  renegotiated  in November  1997,  principal  and  interest of $515 due in
   annual  installments  beginning  January  1999  through  January  2004,  with
   remaining  balance  due  January  2005,  collateralized  by 130 shares of the
   Company's common stock held by the Company,  options expiring in January 2006
   to  acquire  50  shares  of  the  Company's  common  stock  committed  by the
   shareholder  to be provided to the Company,  and a personal  guarantee of the
   shareholder.  The carrying value is equal to the fair value of the 130 shares
   and  options to acquire 50 shares and is net of  unamortized  discount  after
   renegotiation  of  $1,281  based  upon  an  imputed  rate of  10.25%,  and an
   allowance for impairment of $2,110 in 1998 ($2,129 in 1997). No interest
   income was recognized during 1998, 1997 or 1996.                                                  $1,609         $1,590
</TABLE>


                                      F-18
<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


10. Notes and Interest  Receivable -- Related Parties, Collateralized by  Common
    Stock, continued
    ----------------------------------------------------------------------------


<S>                                                                                                  <C>           <C>          
   Notes and  interest  receivable  from 16  current  and  former  officers  and
   employees,  issued upon  exercise of options to purchase 450 shares of common
   stock at $5.31 to $8.38 per share,  bearing  interest at 5.7%,  principal and
   interest due in December 2000, collateralized by 900 shares of the Company's
   common stock.  No interest income was recognized during 1998 or 1997.                                 5,492          5,805

   Notes  receivable  from seven  officers of the Company,  bearing  interest at
   prime  (8.25% at  September  30,  1998) plus 2%,  principal  and interest due
   August 2000,  originally  collateralized by partnership  interests which were
   subsequently  exchanged for 79 shares of the Company's common stock (see Note
   14). Reclassified from notes receivable - related
   parties in 1998.  No interest income has been recognized for any period.                                672            ---

   Other                                                                                                   ---             16
                                                                                                  ------------- --------------
                                                                                                        $7,773         $7,411
                                                                                                  ============= ==============
</TABLE>

11. Fair Value of Financial Instruments

   SFAS No.  107  requires  that  the fair  market  value of  certain  financial
   instruments  be disclosed in the  financial  statements.  The Company has the
   following  financial  instruments  that are subject to the provisions of SFAS
   No. 107:

*        Cash and cash  equivalents
*        Receivables
*        Notes receivable
*        Notes receivable - related parties  
*        Notes payable and convertible debentures 
*        Notes payable - related parties
*        Notes receivable - related parties, from issuance of, or collateralized
         by, common stock

   A  substantial  portion  of  the  Company's  financial  instruments  are of a
   short-term  nature.  Accordingly,  while  the  fair  values  of  some  of the
   individual  financial  instruments  vary somewhat from their carrying values,
   the  aggregate  carrying  values as  reflected  in the  financial  statements
   approximate fair value.

12. Preferred and Common Stock

   Preferred Series A - Non-Voting

   As of September  30, 1998,  there were 3,000 shares of Series A shares issued
   and  outstanding.  The Series A preferred  shares are non-voting and have the
   following rights and privileges:

   1.       The holders of the shares are  entitled to  cumulative  dividends at
            the  rate of 6% per year of the  liquidation  value  of  $1,000  per
            share. These dividends accrue whether or not they have been declared
            or whether the Company has any profits.  Additional shares of Series
            A  preferred  stock  may be  issued  in lieu of cash to pay  accrued
            dividends on these shares.

   2.       Upon the  liquidation  of the  Company,  the holders of the Series A
            preferred shares are entitled to receive $1,000 per share,  together
            with all accrued and unpaid dividends, if any.

   3.       Each  share of  Series A  preferred  stock  includes  a  warrant  to
            purchase  28.571 shares of common stock or a total of 85,713 shares,
            at a price of $8.00 per share.  These warrants  expire on August 31,
            1999.

                                      F-19
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

12. Preferred and Common Stock, continued

   Preferred Series A - Non-Voting, continued

   4.       The holders of the shares are  entitled to convert  their  shares to
            common  shares  at any  time.  The  number  of  common  shares to be
            received upon  conversion is determined by multiplying the number of
            preferred  shares by $1,000 and dividing by the conversion  price of
            $7.00 per share.  At any time after August 31, 1999, the Company has
            the right to require any holder of the Series A preferred  shares to
            convert their shares into common stock.

   5.       No  dividends  have  been  declared  through   September  30,  1998.
            Dividends  in arrears at September  30, 1998  totaled  approximately
            $200,000, or $67 per share.

    Preferred Series B - Non-Voting

   As of September 30, 1998, there were 312,882 shares of Series B shares issued
   and  outstanding.  The Series B preferred  shares are non-voting and have the
   following rights and privileges:

   1.       The holders of the shares are  entitled to  cumulative  dividends at
            the rate of approximately 7% per year of the liquidation value of $7
            per  share.  These  dividends  accrue  whether or not they have been
            declared or whether the Company has any profits.  Additional  shares
            of  Series B  preferred  stock  may be issued in lieu of cash to pay
            accrued dividends on these shares.

   2.       Upon the  liquidation  of the  Company,  the holders of the Series B
            preferred shares are entitled to receive $7 per share, together with
            all accrued and unpaid dividends, if any.

   3.       Each unit (comprising 3 shares) of Series B preferred stock includes
            a warrant to purchase  one share of common stock at a price of $8.00
            per share. These warrants expire on September 30, 1999.

   4.       The holders of the shares are  entitled to convert  their  shares to
            the same  number of shares of common  stock at any time,  subject to
            adjustment for dilution.  Accrued  dividends may be converted by the
            Company  into  common  stock at the  conversion  price of $7.00  per
            share.

   5.       No  dividends  have  been  declared  through   September  30,  1998.
            Dividends  in arrears at September  30, 1998  totaled  approximately
            $162,000,  or $.52 per share.  Based upon the  conversion  price per
            share at the date of issuance,  a non-cash dividend of approximately
            $165,000 was imputed upon issuance.

13. Stock Options and Warrants

   Stock Options

   At  September  30,  1998,  the Company had one stock option plan (the "Option
   Plan") under which 2,400,000 shares of common stock are reserved for ultimate
   issuance. A committee of the Company's Board of Directors, or in its absence,
   the Board (the "Committee")  administers and interprets the Option Plan. This
   Committee  is  authorized  to grant  options and other  awards both under the
   terms of the Option Plan and  outside the Option Plan to eligible  employees,
   officers, directors, and consultants of the Company. The Option Plan provides
   for the granting of both  incentive  stock  options and  non-statutory  stock
   options.  Terms of options granted under the Option Plan,  including  vesting
   requirements,  are  determined by the  Committee.  Options  granted under the
   Option Plan vest over periods  ranging from 0 to ten years,  expire ten years
   from the date of grant and are not transferable  other than by will or by the
   laws of descent and distribution. Incentive stock option grants must meet the
   requirements of the Internal Revenue Code.

                                      F-20
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


13. Stock Options and Warrants, continued

   Stock Options, continued

   The Company has elected to  continue  to apply  Accounting  Principles  Board
   Opinion No. 25,  "Accounting  for Stock Issued to Employees"  ("APB 25"), and
   related  interpretations  in accounting for its Option Plan. The  alternative
   fair value method of accounting  prescribed by SFAS No. 123,  "Accounting for
   Stock-Based  Compensation" ("SFAS 123"), requires the use of option valuation
   models that were not developed for use in valuing employee stock options,  as
   discussed below. Accordingly,  under APB 25, no compensation expense has been
   recognized for stock option grants to employees,  officers and directors when
   the exercise price of stock options equals or exceeds the market price of the
   Company's common stock on the date of grant.

   When  options  are issued  with terms  considered  compensatory,  the related
   compensation  expense is  amortized  to expense  over the  specified  vesting
   period on a straight-line  basis.  Deferred  compensation  related to options
   issued in 1998,  1997 and 1996 that  vest  over  time was  approximately  $0,
   $1,178,000 and $4,668,000,  respectively.  The amortized compensation expense
   related to these options was approximately $908,000,  $1,572,000 and $910,000
   for 1998,  1997 and  1996,  respectively.  Compensation  expense  related  to
   options that vested  immediately  was  approximately  $127,000,  $103,000 and
   $3,863,000 for 1998, 1997, and 1996, respectively.

   If the Company had elected to account for options  granted in 1998,  1997 and
   1996 based on their fair value,  as  prescribed by SFAS 123, net loss and net
   loss per share would have been  increased to the pro forma  amounts  shown in
   the table below.
<TABLE>
<CAPTION>

  (thousands of dollars, except per-share data)                                    1998             1997            1996
  --------------------------------------------------------------------------- ---------------- --------------- ---------------

<S>                                                                                  <C>            <C>             <C>      
  Net loss attributed to common stockholders -- reported                             $(4,323)       $(11,184)       $(13,836)
                                             -- pro forma                             (7,245)        (11,799)        (14,530)
  Basic and diluted net loss per share - reported                                       (.43)          (1.38)          (1.99)
                                       --pro forma                                      (.73)          (1.46)          (2.09)
</TABLE>

   The  fair  value  of  each  stock  option  grant  was  determined  using  the
   Black-Scholes  option pricing model and the following  assumptions:  expected
   stock price  volatility  of .67 to .70,  risk-free  interest  rate of 4.4% to
   7.8%,  weighted  average expected option lives of 10 years, and no dividends.
   The Black-Scholes  option valuation model was developed for use in estimating
   the fair value of traded options which have no vesting  restrictions  and are
   fully transferable. In addition, option valuation models require the input of
   highly  subjective  assumptions  including  expected stock price  volatility.
   Because  the  Company's  stock  options  have  characteristics  significantly
   different from those of traded options, and because changes in the subjective
   input  assumptions  can  materially  affect the fair value,  in  management's
   opinion the  existing  models do not  necessarily  provide a reliable  single
   measure of the fair value of stock options.

                                      F-21
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

13. Stock Options and Warrants, continued

   Stock Options, continued


   The following  table is a summary of activity for all of the Company's  stock
   options for the years ended September 30:
<TABLE>
<CAPTION>

                                                         1998                       1997                      1996
                                                              Weighted                  Weighted                   Weighted
                                                              Average                    Average                   Average
                                                              Exercise                  Exercise                   Exercise
  (thousands of shares)                          Shares        Price        Shares        Price        Shares       Price
  ------------------------------------------- ------------- ------------- ------------ ------------ ------------ -------------
<S>                                                  <C>           <C>          <C>          <C>          <C>           <C>  
  Outstanding at beginning of year                   1,614         $2.85        1,367        $1.62        2,030         $2.37
     Granted                                           850         12.34          445         6.08        1,612          3.51
     Exercised                                        (94)          1.93         (73)         1.84      (1,085)          5.92
     Canceled                                          ---           ---        (125)         1.50      (1,190)          1.54
                                              ============= ============= ============ ============ ============ =============
  Outstanding at end of the year                     2,370         $6.29        1,614        $2.85        1,367         $1.62
                                              ============= ============= ============ ============ ============ =============

  Exercisable at end of year                         1,038         $5.23          712        $2.04          463
                                              ============= ============= ============ ============ ============ =============

  Weighted average fair value of options
  granted during the year below market                            $10.21                     $9.53                     $12.66

  Weighted average fair value of options
  granted during the year at market                                $9.91                     $5.57                         $0

<CAPTION>

   The  following  table   summarizes   information   about  all  stock  options
   outstanding at September 30, 1998:

   (thousands of shares)                        Options Outstanding                               Options Exercisable
   ------------------------ ------------------------------------------------------------- ------------------------------------
                                                        Weighted
                                   Number               Average            Weighted            Number            Weighted
                               Outstanding at          Remaining            Average        Exercisable at        Average
      Range of Exercise         September 30,       Contractual Life       Exercise         September 30,        Exercise
           Prices                   1998                in Years             Price              1998              Price
   ------------------------ ---------------------- ------------------- ------------------ ------------------ -----------------
<S>         <C>                             <C>                   <C>              <C>                  <C>             <C>  
   $1.50 to $3.50                           1,221                 7.3              $1.58                602             $1.66
   $7.00 to $9.00                             397                 8.5               8.22                257              8.20
   $11.00 to $13.56                           752                 9.0              12.92                179             13.02
                            ----------------------                                        ------------------
                                            2,370                                                     1,038
                            ======================                                        ==================
</TABLE>

   Stock Warrants

   As of September 30, 1998, there were warrants outstanding for the purchase of
   approximately  2,033,000  shares of common stock at prices ranging from $7.00
   to $30.00 per share and with expiration  dates from October 1998 to September
   2000. All of these warrants were issued in connection with private placements
   of common and preferred  stock or notes payable during the years 1996 through
   1998.

   In October  1998,  the Company  issued  warrants  for the purchase of 100,000
   shares of common  stock in  accordance  with the terms of a note payable to a
   corporation (see Note 7).

                                      F-22
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------



14. Purchase of Limited Partners' Interests in Subsidiaries

   In September 1998, the Company  formally  offered the limited partners in its
   two  consolidated  subsidiaries,  Utah Synfuel #1, and Alabama Synfuel #1, an
   exchange  of  the  Company's  common  stock  for  their  limited  partnership
   interests.  The exchange ratio was based in part on an independent  valuation
   of the  limited  partnerships'  assets and other  factors  including  but not
   limited to current and future expected cash flows of the partnerships and the
   market value of the  Company's  common stock at the date of the offer,  $9.00
   per  share.  As of  September  30,  1998,  substantially  all of the  limited
   partners had elected to exchange  their  limited  partnership  interests  for
   shares of the Company's  common stock.  During October and November 1998, all
   but one of the other  limited  partners  exchanged  their  interests and Utah
   Synfuel  #1 became a  wholly-owned  subsidiary  of the  Company  and  Alabama
   Synfuel #1 became a 98%-owned subsidiary of the Company. The Company recorded
   this exchange  using the market  values of the Company's  common stock on the
   dates the limited partners tendered  acceptance of the Company's offer. These
   market values ranged from $6.75 to $11.13 per share.

15.  Discontinued Operations

   In  1995,  the  Company  made a  strategic  decision  to  focus  its  efforts
   exclusively  on  commercializing  the  Briquetting  Technology  and to divest
   itself of its  construction  subsidiaries.  In September  1995,  the Board of
   Directors approved a plan to dispose of the  construction-related  operations
   and in February 1996 entered into a stock  purchase  agreement to sell all of
   the common shares of the  subsidiaries for a $5,000,000 face value promissory
   note. The terms of the original agreement were clarified in November 1997 and
   the financial effect is included in the change in the allowance to reduce the
   promissory  note to  collateral  value  (discussed  below).  Because the note
   includes a favorable  interest rate for the buyer, the Company has calculated
   the present  value of the note using a market rate of 10.25% over the term of
   the note. The effect of discounting the note at 10.25% was to reduce the note
   to  approximately  $3,719,000  as of the  renegotiation  date.  The  original
   discount  on the note was  included  in the  estimated  loss on  disposal  of
   discontinued operations in 1996.

   Because the note is  collateralized  by the  Company's  common  stock,  it is
   reflected  in  the  consolidated  financial  statements  as  a  reduction  of
   stockholders'  equity.   Additionally,   the  note  is  adjusted  to  reflect
   subsequent  increases or decreases in the fair value of the  Company's  stock
   and stock options held as collateral.  Subsequent changes in the value of the
   collateral  will  be  reflected  in the  statement  of  operations  and as an
   increase or decrease to the carrying value of the note.

   Under the terms of the  agreement,  the Company  agreed to pay  $3,500,000 of
   accounts  payable  and  lines  of  credit  outstanding  in the  subsidiaries.
   Subsequently,  the buyer also  received  reimbursement  from the  Company for
   approximately  $650,000 of additional  expenses  related to the  discontinued
   operations  during the  wind-down  period  which were paid by the buyer.  The
   Company  has  reflected  those   obligations  in  the  loss  on  discontinued
   operations   in  1996.   Revenues  of  the   discontinued   operations   were
   approximately $1,397,000 for the four months ended February 1, 1996, the date
   of sale.

                                      F-23
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


16.  Commitments and Contingencies

   Commitments  and  contingencies  as  of  September  30,  1998  not  disclosed
   elsewhere, are as follows:

   Leases

   Rental expense was approximately  $473,000,  $318,000, and $330,000 for 1998,
   1997 and 1996, respectively. The Company has a noncancellable operating lease
   for  equipment  through  the year 2000 and other  operating  leases  for real
   estate.  At  September  30,  1998,  minimum  rental  payments due under these
   leases, are as follows:

               Year ending September 30:    (thousands of dollars)
              ----------------------------- -----------------------
                          1999                                $664
                          2000                                 496
                          2001                                 314
                          2002                                 113
                          2003                                  36
                                            =======================
                                                            $1,623
                                            =======================

   Letters of Credit

   During 1998, the Company  entered into letter of credit  arrangements  with a
   bank that  provide  for the  issuance  of  letters of credit  totaling  up to
   $938,000.  These  arrangements are  collateralized by certificates of deposit
   totaling  $588,000  that  are  included  in  restricted  investments  in  the
   accompanying balance sheet. As of September 30, 1998, there was approximately
   $560,000 of liabilities covered by these arrangements.

   Legal or Contractual Matters

   Included in accrued  liabilities is $755,000  ($1,477,000 in 1997) related to
   construction  contracts  that  contained  a "failure  to  proceed"  liability
   clause.

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

   In June 1997,  the Company sold the Utah Synfuel #1 facility to Coaltech.  In
   connection  with this sale, Utah Synfuel #1 sold to Coaltech a license to use
   the Company's Briquetting Technology for an advance license fee of $1,400,000
   and an  earned  license  fee that is  payable  quarterly  and is  based  upon
   briquettes manufactured and sold at the Utah Synfuel #1 facility. The Company
   contracted  with  Coaltech  to operate the  facility  for which it receives a
   quarterly fee which is also based upon briquettes produced and sold. Coaltech
   has an option  wherein they can require the Company to purchase this facility
   under certain  conditions.  The purchase price is equal to fair market value,
   not to exceed 50% of the amounts paid to Covol by Coaltech.

   Additionally,  the  Company  entered  into a supply  and  purchase  agreement
   wherein the Company  agreed to provide coal fines to Coaltech for  processing
   into  synthetic  fuel at a price  equal to its cost.  The  Company  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,  the Company  expects to incur a loss under this supply and  purchase
   agreement  which will reduce the earned  license fees  received.  The Company
   believes the earned  license fees will exceed the losses  incurred  under the
   supply and purchase agreement. Because of the expected loss under this supply
   and purchase  agreement,  revenue  recognition of the advance license fee has
   been deferred as of September 30, 1998 and 1997.

                                      F-24
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------


16. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

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

   In May 1995, the Company  entered into an agreement with Geneva Steel Company
   to build and operate a commercial iron revert briquetting plant. The facility
   never reached  commercial  productivity  levels and is not  operational.  The
   Company may use this  equipment for the  production of synthetic  fuel or for
   testing purposes.

   The  Company  entered  into a letter of intent with  Innovative  Technologies
   ("Innovative") in July 1995 to apply the Company's Briquetting  Technology to
   certain metallic ores supplied by Innovative.  The Company conducted numerous
   tests of the ore through  the fall of 1995,  and  concluded  from the results
   that the venture was not economically viable. Accordingly, final agreement to
   process the ore was never reached. In March 1997, Innovative Holding Company,
   Inc.,  filed a civil  complaint  against the Company  alleging  breach of the
   letter of intent and damages in excess of $500,000.  The Company successfully
   defended this action which was dismissed with prejudice.

   In December 1996, the Company entered into license agreements with affiliates
   of Pace Carbon  Fuels,  L.L.C.  (collectively  "Pace") for the use of Company
   technologies at four synthetic fuel  manufacturing  facilities owned by Pace.
   In 1998 Pace requested a reduction in the license fees payable to the Company
   under the license agreements.  Upon condition of immediate payment by Pace of
   advance  license  fees,  the Company  agreed to a reduction in future  earned
   license fees.  This reduction was  accomplished  by a ten-year loan agreement
   whereby the Company would loan to Pace up to $750,000 each quarter  beginning
   in November 1998. The Company's loan to Pace will be repaid at the end of the
   ten years only if the Pace projects have  accumulated  sufficient  prescribed
   earnings. Revenues from earned license fees will be recognized by the Company
   only to the  extent  that  amounts  exceed  the  loan  commitment.  Pace  has
   requested a loan of  $750,000  for the  November  1998  quarter.  The Company
   believes  that its current loan  obligation  to Pace is limited to the earned
   license fee  receivable  by the Company for the quarter  ended  September 30,
   1998, which is believed to be approximately $300,000.

   In January 1996, a manager of the Company  entered  property  owned by Nevada
   Electric  Investment  Company, a subsidiary of Nevada Power  Corporation,  in
   connection  with an offer by the Company to purchase the  property,  and with
   certain other employees of the Company,  removed some asbestos over a two-day
   period. In May 1996, the Company 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. The Company
   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. The Company does not know the results of
   the grand jury inquiry or whether the inquiry is completed.  The Company does
   not believe that the  resolution of this matter will have a material  adverse
   effect on the Company.

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

                                      F-25
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, continued
                                   ----------

16. Commitments and Contingencies, continued

   Legal or Contractual Matters, continued

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

   Employment Contracts

   The Company has entered into  employment  agreements with the Chief Executive
   Officer,  President,  Chief Financial  Officer and two vice  presidents.  The
   agreements,  which are  renewable  by the Company,  generally  have a term of
   approximately  three  years and  provide  for annual  salaries  and  benefits
   ranging from  approximately  $80,000 to $190,000  annually  per officer,  and
   currently totaling approximately $600,000 for all five officers combined. All
   agreements provide for termination benefits under specific conditions ranging
   up to 200% of the then current annual salaries.

17. Events Subsequent to September 30, 1998

   Subsequent to September 30, 1998, a total of approximately  308,000 shares of
   the Company's common stock were issued on conversion of approximately 285,000
   shares of Series B preferred stock and related  accrued but unpaid  dividends
   in arrears.

   During   November  and  December  1998,  the  Company   completed   financing
   transactions that consisted of $400,000 of debt and approximately  $3,500,000
   of equity. The debt has a term of twelve months,  bears interest at 15%, with
   an interest  only  payment due in six months and with the balance of interest
   and principal due at maturity.  The debt is  collateralized by certain assets
   of the Company and is due prior to maturity  upon the  placement of long-term
   financing by the  Company.  The equity  transaction  consisted of the sale of
   units  at a price  of  $5.00  per  unit.  A unit  consists  of one  share  of
   restricted  common stock plus a warrant to purchase one  additional  share of
   restricted common stock at an exercise price of $7.50. The warrants expire in
   twelve months if not  exercised.  The  restricted  stock and shares  issuable
   pursuant to the related  warrants have been provided  piggyback  registration
   rights.

   The Company has  received  term sheets for the sale of up to  $10,000,000  of
   convertible  preferred stock.  This financing is expected to close in January
   1999.

                                      F-26