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

                                    FORM 10-K

                        For Annual and Transition Reports
                        Pursuant to Sections 13 or 15(d)
                     of the Securities Exchange Act of 1934

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
                                [NO FEE REQUIRED]
                  For the fiscal year ended September 30, 1997
                                       OR
[ ]     TRANSITION  REPORT  PURSUANT TO SECTION 13 OR  15(d) OF  THE  SECURITIES
        EXCHANGE ACT OF 1934
                                [NO FEE REQUIRED]

         For the transition period from .............. to ..............

                         Commission file number 0-27803
                         ------------------------------

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

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

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

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

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

             Covol Technologies, Inc. Common Stock, $.001 par value
    (Securities are traded on the OTC Bulletin Board under the symbol "CVOL")

          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 on December 15, 1997 was $96,571,353.

          The number of shares  outstanding of each of the registrant's  classes
of common stock as of December 15, 1997 was 9,298,175.
                       -----------------------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference:

None.

<PAGE>

                                TABLE OF CONTENTS

                                                                           Page
PART I

   ITEM 1.       BUSINESS...................................................  1

   ITEM 2.       PROPERTIES................................................. 19

   ITEM 3.       LEGAL PROCEEDINGS.......................................... 20

   ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 21

PART II

   ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS........................................ 21

   ITEM 6.       SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............ 27

   ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS........................ 30

   ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
                 MARKET RISK................................................ 38

   ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 38

   ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE........................ 38

PART III

   ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 39

   ITEM 11.      EXECUTIVE COMPENSATION..................................... 45

   ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT................................................. 50

   ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 53

PART IV

   ITEM 14.      EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K.... 56

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.

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

The Company

         The primary  business of Covol  Technologies,  Inc.  (the  "Company" or
"Covol")  is  to  commercialize  patented  and  proprietary   technologies  (the
"Briquetting Technology") used to recycle waste by-products from the coal, steel
and other  industries  into a marketable  source of fuel,  revert  materials and
other  marketable  resources in the form of  briquettes,  extrusions  or pellets
("briquettes").

         Covol was  originally  incorporated  in  Nevada in 1987  under the name
Cynsulo, Inc. In 1988, the Company consummated an initial public offering of its
common stock in Nevada in which the Company sold 200,000 shares for $20,000.  At
the time of such  public  offering,  the  Company  was  engaged  in no  material
business  activities.  In December 1988, the Company  acquired all of the issued
and  outstanding  shares  of  McParkland  Corporation  and  changed  its name to
McParkland Properties,  Inc.  ("McParkland").  McParkland invested in discounted
notes and contracts through the Federal Deposit Insurance Corporation.  In 1989,
management  became  aware of certain  irregularities  relating  to the  original
purchase of two loan  packages.  As a result of an  investigation  conducted  by
management,  the purchase of McParkland  was rescinded in February 1990, and the
Company's  name was changed to Riverbed  Enterprises,  Inc. In August 1990,  the
Company's focus was changed to the growing and marketing of certain agricultural
products, primarily alfalfa. In 1991, the Company acquired technology consisting
of binding agents used to make briquettes.  The Company shifted its focus to the
research and development of better and stronger binding agents which resulted in
patenting the  Briquetting  Technology.  The Company then changed its focus from
its agricultural business and devoted its primary efforts to the development and
commercialization of the Briquetting Technology.  The Company's name was changed
to Enviro-Fuels  Technology,  Inc. in July 1991, to  Environmental  Technologies
Group International in 1994, and to Covol Technologies,  Inc. in August 1995, at
which time the Company was reincorporated in Delaware.

         In 1993, the Company acquired three  construction  companies engaged in
providing  contracting and construction  services to the steel, copper and other
heavy industries. The companies were Industrial Management and Engineering, Inc.
("IME"), State Incorporated ("State") and Central Industrial Construction,  Inc.
("CIC").  Additionally,  in 1994, the Company acquired Larson Limestone Company,
Inc.  ("Larson"),  which  mines,  produces  and markets  limestone  products for
industrial applications. IME, State, CIC and Larson are collectively referred to
as the "Construction Companies."

         In September  1995, the Company made a strategic  decision to focus its
efforts exclusively on commercializing the Briquetting  Technology and to divest
itself of the  Construction  Companies.  Accordingly,  on February 1, 1996,  the
Company entered into a Share Purchase  Agreement ( the "Agreement") with Michael
McEwan and Gerald Larson,  former principals of the Construction  Companies (the
"Buyers"),  to sell all of the common  shares of the  Construction  Companies to
Buyers. See "ITEM 1. BUSINESS--Construction and Limestone Businesses."

         Partnerships.  In June 1996,  the Company  formed Utah Synfuel #1, Ltd.
("US #1") and  Alabama  Synfuel  #1,  Ltd.  ("AS #1"),  each a Delaware  limited
partnership  (collectively the  "Partnerships").  The Company has retained a 60%
interest in US #1 and a 80% interest in AS #1 and privately placed the remaining
partnership interests in the Partnerships.  The limited partners paid $3,277,500
for  the  remaining  partnership  interests  in US #1  and  $2,062,500  for  the
remaining partnership interests in AS #1.

                                        1
<PAGE>

         Funds  raised in AS #1 and US #1 were used to  purchase  equipment  and
begin  construction  on the synthetic  coal  briquetting  plants in  Birmingham,
Alabama  (the  "Alabama  Plant"),  through AS #1, and in Price,  Utah (the "Utah
Plant"),  through US #1.  The  Company  and AS #1  subsequently  entered  into a
contract to sell the Alabama Plant to Birmingham Syn Fuel,  L.L.C.  ("BSF"),  an
affiliate of PacifiCorp Financial Services,  Inc.  ("PacifiCorp").  See "ITEM 1.
BUSINESS--Business  of the  Company--Alabama  Plant." The Utah Plant was sold to
Coaltech No. 1 LP ("Coaltech"),  a Delaware limited partnership,  which consists
of the Company as a 1% general partner,  AJG Financial  Services,  Inc. as a 24%
limited  partner  and Square D Company as a 75%  limited  partner.  See "ITEM 1.
BUSINESS--Business of the Company--Utah Plant." Under the partnership agreements
for the  Partnerships,  the  Company  is  entitled  to  distributions  from  the
Partnerships   according  to  the  Company's  percentage  interest  in  the  net
distributable cash flow of the Partnerships.

         Flat Ridge Corporation. On October 15, 1997, the Company organized Flat
Ridge Corporation ("FRC"), a Utah corporation, as a wholly-owned subsidiary. The
purpose  of  FRC  is to  develop  sites  for  the  construction  of  briquetting
facilities.  To date FRC has incurred costs for the permitting of a site in West
Virginia. There has been no other significant business conducted by FRC.

         Covol Australia. On December 6, 1996, Covol Australia, Ltd. ("CAL"), an
Australian corporation,  was formed by the Company and MT Technologies,  Inc., a
British  Virgin  Islands  corporation  with  offices in Hong Kong.  The  Company
initially retained a 15% interest in CAL and entered into a licensing  agreement
with CAL for the use of the  Briquetting  Technology in Australia.  On September
10, 1997, the Company acquired from the other CAL  stockholders  their interests
in  exchange  for  30,000  shares of Company  common  stock,  thus  making CAL a
wholly-owned  subsidiary  of the  Company,  amounts  paid in excess of  tangible
assets  acquired are shown in the financial  statements as payment for services.
The Company intends to commercialize its Briquetting Technology in Australia and
in other foreign countries. There was no significant business activity conducted
by CAL during the fiscal year ended September 30, 1997.

         As of the  filing of this  report,  the  consolidated  business  of the
Company  consisted of Covol as the parent  company,  FRC and CAL as wholly-owned
corporate  subsidiaries,  and US #1 and AS #1 as limited partnerships,  of which
the Company is both the general partner and a limited partner, holding a 60% and
80% interest, respectively.

         Effective January 1, 1994, the Company changed its fiscal year-end from
December 31 to September 30. Effective June 14, 1995, the Company  implemented a
one-for-twenty  reverse  stock  split  relating to its common  stock.  Effective
January 23, 1996,  the Company  implemented  a  two-for-one  forward stock split
relating to its common stock. Except as otherwise indicated, all information set
forth herein has been  adjusted to give effect to such stock  splits.  Effective
June 25,  1997,  the  Company  approved  a new  class of  preferred  stock in an
authorized amount of 10,000,000 shares.

         The Company  anticipates  that its expansion  plans and working capital
requirements  through  the fiscal  year  ending  September  30, 1998 will be met
through payments from the sale of briquetting  facilities,  advance license fees
which consist of a one-time  payment for the use of the  Briquetting  Technology
royalties,  based  on  production  by  licensees  of the  Company's  Briquetting
Technology, profits from the sale of binder and proceeds from project financings
and equity and debt  offerings as of the date of this Annual  Report.  Depending
upon the  amount and  timing of these  capital  resources,  the  Company  may be
required to raise  additional  capital through  private  offerings of equity and
debt  securities.  No  assurances  can be made  that the  Company  will  operate
profitably,  receive  sufficient  revenues from the sources listed above,  or if
need  be,  will be able to  raise  sufficient  capital  through  equity  or debt
offerings.

                                        2
<PAGE>

Business of Company

         The Company has developed the  Briquetting  Technology to recycle waste
by-products  such as iron revert,  coke breeze and coal fines from the steel and
coal industries into marketable  sources of fuel or raw materials in the form of
briquettes.  During the steel-making process,  steel mills produce,  among other
waste  by-products,  revert  materials  (small  particles  containing  iron-rich
materials).  Coke breeze is a fine residue  resulting  from the  production  and
storage of coke, a coal derivative used in the steel-making process.  During the
coal-mining process,  coal fines (small coal particles ranging from dust size to
less  than 1/4" in  diameter)  are  produced.  Notwithstanding  the  significant
potential value in the revert  materials,  coke breeze and coal fines, the steel
and  coal  industries  historically  have  not been  able to  develop  effective
processes whereby these valuable resources can be captured and utilized. Indeed,
these materials have presented a disposal  problem for steel and coal producers,
who  may  incur   substantial   costs  in  complying   with  federal  and  state
environmental laws and regulations relating to their storage and disposal.

         The Briquetting Technology employs pressure and chemical agents to bind
coal fines, coke breeze and revert materials into briquettes.  The coal and coke
briquettes  produced through use of the Briquetting  Technology are suitable for
industrial and commercial use and are comparable to run-of-mine  coal and formed
coke. The revert  material  briquettes  produced  through use of the Briquetting
Technology are further  processed in reducing furnaces to reclaim iron and other
materials.  The revert  processed  through use of the Briquetting  Technology is
comparable to scrap iron, a common form of raw material used by the steel-making
industry. See "ITEM 1.  BUSINESS--Briquetting  Technology." The Company believes
that its coal  and  coke  briquettes  and  reclaimed  iron can be  produced  and
marketed at prices which are competitive with run-of-mine  coal, formed coke and
other sources of scrap iron. Moreover, the Company believes that the Briquetting
Technology  will be  attractive to steel and coal  producers in  addressing  the
environmental issues surrounding the disposal of waste by-products  generated in
the production process.

         In addition to the uses described above, the Briquetting Technology may
also have other  applications.  The Company has  successfully  briquetted  other
materials such as molybdenum,  grinding  swarf,  lead dross and rutile to name a
few. The Company has not explored  the  commercial  viability of these and other
applications.

         The Company's  fundamental  business  strategy is to commercialize  the
Briquetting Technology through investors, limited partnerships,  licenses, joint
ventures and  collaborative  arrangements  with steel,  coke and coal producers.
Because of the potential for tax credits in  connection  with the  production of
synthetic fuels from coal fines at briquetting  plants placed in service by June
30,  1998 (see "ITEM 1.  BUSINESS--Tax  Credits"),  the  principal  focus of the
Company during fiscal year 1997 has been the development  and  commercialization
of the Briquetting Technology with respect to coal. The Company will continue to
focus on the coal application through fiscal year 1998.

         Alabama Plant

         The Company, through AS #1, is currently constructing the Alabama Plant
in Birmingham,  Alabama. The plant will manufacture synthetic fuel from coal and
is  expected to have an annual  capacity  of  approximately  360,000  tons.  The
Company anticipates that the construction of the Alabama Plant will be completed
by February 15, 1998. However,  there are no assurances that the construction of
the Alabama  Plant will be completed by that date or that it will produce at its
expected capacity.

         Pursuant to the Alabama Project Purchase  Agreement,  dated as of March
20, 1997 (the  "Alabama  Purchase  Agreement"),  between the Company,  AS #1 and
Birmingham  Syn Fuel,  L.L.C.  ("BSF") a  wholly-owned  subsidiary of PacifiCorp
Financial Services, Inc. (together with any affiliates, "PacifiCorp"), the

                                        3
<PAGE>

Company  and AS #1 have agreed to sell,  and BSF has agreed to buy,  the Alabama
Plant,  subject to the terms and conditions of the Alabama  Purchase  Agreement.
The  purchase  price for the Alabama  Plant should  approximate  the cost of the
Alabama Plant and will be payable in the form of a nonrecourse  promissory  note
secured by certain portions of the Alabama Plant.  There are several  conditions
precedent  to the closing of the sale of the Alabama  Plant.  One  condition  to
closing  was the  receipt by BSF of a Private  Letter  Ruling  ("PLR")  from the
Internal Revenue Service  ("IRS").  BSF received a favorable PLR in August 1997.
The receipt of the PLR triggered the payment of $250,000 in advance license fees
under the  license  agreement,  which was  included  in  deferred  revenue as of
September 30, 1997, and will be recognized upon completion of the Alabama Plant.
An  additional  fee of $250,000 is payable  upon the  completion  of the Alabama
Plant construction.  The Company believes that it has met or will meet all other
conditions  for the sale of the Alabama  Plant;  however,  there is no assurance
that all conditions will be met.

         Pursuant  to a  license  agreement,  BSF  will  pay  quarterly  royalty
payments  at a  prescribed  dollar  amount  multiplied  by the amount of British
thermal  units  ("Btu") 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(d)(2) of the Internal
Revenue Code of 1986, as amended (the "Code").  The amount to be paid is subject
to adjustment to the extent that BSF incurs an operating  loss on the production
and sale of synthetic  fuel  (exclusive  of the amount BSF pays as a license fee
for the use of the technology).

         The Company also has agreed to provide  binder  material to BSF for the
manufacture and production of synthetic fuel at an amount equal to the Company's
cost plus a  prescribed  mark-up.  The  mark-up may be reduced to the extent BSF
incurs a loss on the  production  and sale of synthetic  fuel, but not below the
Company's cost for such binder materials.

         Pursuant to a  conditional  option  agreement,  the  Company  agreed to
purchase all of the rights, title and interests of certain PacifiCorp parties in
BSF and all  interests of  PacifiCorp  in its original $5 Million draw down loan
(described  herein,  and  subsequently  amended to $7  Million) if a PLR was not
received.  Based  upon  BSF's  receipt of the PLR in August  1997,  the  Company
believes that the conditional  option agreement has terminated  according to its
terms.

         Utah Plant

         The Company,  through US #1, constructed the Utah Plant in Price, Utah.
The Utah  Plant is a  synthetic  fuel  briquetting  facility  with a  production
capacity of approximately 360,000 tons per year. On March 10, 1997, the Company,
together with US #1,  finalized the sale of the Utah Plant for $3.5 Million,  in
the form of a nonrecourse  promissory note (the "Utah Note"),  all in accordance
with a Utah Project Purchase  Agreement,  dated as of March 7, 1997, between the
Company,  US #1 and Coaltech (the "Utah  Purchase  Agreement").  The sale of the
Utah Plant resulted in a loss of approximately $581,000. The aggregate principal
balance of the Utah Note accrues  interest at a fixed  interest  rate of 9.6552%
per annum,  and is to be repaid in forty-four (44) equal  consecutive  quarterly
installments of principal and interest in the amount of $130,000,  commencing on
March 31, 1997. As of September  30, 1997,  one payment has been  received.  The
Utah Note is secured by a security  interest in the Utah Plant, and in the event
of a default  under  the Utah  Note,  the  Company's  and US #1's sole  right to
recovery is limited to the Utah Plant as pledged collateral without any recourse
against Coaltech.  Accordingly,  payments under the Utah Note will be subject to
the profitable  production and sale of briquettes at the Utah Plant. If payments
are made on the Utah Note and the  sublicense  agreement  described  below,  the
Company is only entitled to receive a  distribution,  if any, in accordance with
its percentage ownership of US #1. Currently,  the Company has a 60% interest in
US #1.

         The  purchaser of the Utah Plant,  Coaltech,  consists of AJG Financial
Services,  Inc., a Delaware corporation and wholly-owned subsidiary of Arthur J.
Gallagher & Co. ("Gallagher"),  and Square D Company, a Delaware corporation and

                                        4
<PAGE>

wholly-owned  subsidiary of Groupe  Schneider,  as 24% and 75% limited partners,
respectively,  and the  Company as a 1% general  partner.  Coaltech is a limited
partnership with no assets other than the Utah Plant, capital contributions made
by the partners and the sublicense described below.

         In  connection  with the  execution  and delivery of the Utah  Purchase
Agreement, US #1 granted Coaltech a non-exclusive  sublicense of the Briquetting
Technology  all pursuant to a License  Agreement,  dated as of March 7, 1997, by
and among US #1 as licensor, the Company as vendor, and Coaltech as licensee and
vendee (the "Utah License Agreement").  Under the Utah License Agreement,  US #1
received an advance license fee of $1.4 Million, included in deferred revenue as
of September  30, 1997,  and depending  upon the amount of  briquettes  that are
produced and sold as  "qualified  fuels" under Section 29 of the Code, US #1 may
receive an earned license fee payable quarterly. The earned license fee is based
upon the product of an  established  dollar amount  multiplied by the Btu of the
briquettes  manufactured  and sold at the Utah  Plant.  The  established  dollar
amount is  subject to annual  adjustment  based  upon an  "inflation  adjustment
factor"  as set  forth  in  Section  29(d)(2)  of the  Code.  US #1 also has the
opportunity to receive an additional  $1.1 Million as a goal fee if (i) the Utah
Plant during any  consecutive  seven day period produces and sells 7,140 tons of
qualifying briquettes, (ii) the Company completes the installation of additional
equipment at the facility (which has been installed),  and (iii) notice is given
to Coaltech  regarding  such  production  and  installation.  The Company cannot
predict  with any  certainty  the  amount of  ongoing  license  fees that may be
generated under the Utah License Agreement.

         Also under the Utah License  Agreement,  the Company has agreed to sell
certain  proprietary  binder  material  necessary to produce the  briquettes  to
Coaltech at an established rate per ton subject to annual  adjustment based upon
the producer price index. The Utah License Agreement extends to the later of (i)
January 1, 2008 or (ii) the  corresponding  date after which tax credits may not
be claimed or otherwise available under Section 29 of the Code.

         The Company contracted with Coaltech to act as operator of the facility
for a quarterly  fee based upon the amount of  briquettes  produced and sold per
year. The Company cannot predict with any certainty the amount of quarterly fees
that may be  generated  under  its  operation  and  maintenance  agreement  with
Coaltech.  Moreover,  the Company  granted  Coaltech a put option to require the
Company to purchase  from  Coaltech  the Utah Project if (i) all of the Coaltech
limited  partners  are unable to utilize  the federal  income tax credits  under
Section 29 of the Code, (ii) the economic benefits accruing to or experienced by
all of the Coaltech  limited partners shall differ  significantly  from what was
initially  projected,  or (iii) there is a permanent  force  majeure or material
damage or destruction of the Utah Plant. If the put option is exercised prior to
the third  anniversary  date of the grant, 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 Utah
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  Plant,  the  Company and US #1 entered
into a Supply and Purchase  Agreement  with Coaltech.  Under the agreement,  the
Company  agreed to  provide  coal fines to the Utah  Plant for  processing  into
synthetic fuel at an amount equal to the Company's per ton costs  (including any
wash costs).  See discussion of wash plant below.  Furthermore,  US #1 agreed to
purchase from  Coaltech the synthetic  fuel produced at its cost plus one dollar
per ton.  Coaltech has the right to market its synthetic  fuel to a third party,
with US #1 having a right of first refusal to purchase such synthetic  fuel. The
Company  incurred a loss of $1,547,674  in the year ended  September 30, 1997 in
connection with this agreement.

         Finally,  the building and surrounding  property that  accommodates the
Utah Plant was  constructed so as to be capable of housing a second  briquetting
facility. The Company granted to Coaltech the right to purchase a second line if

                                        5
<PAGE>

constructed  at the Utah Plant site under  terms  comparable  to the sale of the
Utah Plant. If the Company sells a second line to Coaltech, it is also obligated
to sell the building,  binder plant,  and other  equipment that were not part of
the Utah Plant sold.  The  decision to  construct  the second line is  dependent
upon, among other things,  identifying  adequate fines to operate a second line,
marketing  of  the  synthetic  fuel  from  a  second  line,  and  financing  for
construction  of the second  line.  The Company can give no  assurance  that the
second  facility  will be  built,  or that,  if  built,  such  facility  will be
purchased by Coaltech.

         Since the Utah Plant was first  placed in  service  it has  experienced
several  problems,  including  insufficient  drying capability for the synthetic
fuel product,  inadequate  clean coal fines as a feedstock for  operations,  and
inability to market to  end-consumers  the synthetic fuel product  produced from
the high ash feedstock.  The steps the Company has taken or is taking to address
these problems are described below.

         Subsequent  to the sale of the Utah  Plant  and as a  condition  of the
sale,  the Company  removed the dryers that were then a part of the facility and
added a larger  dryer having the capacity to dry the output from the Utah Plant.
This  installation  was  completed  in  May  1997.  The  Company  believes  this
modification has remedied the drying problem.

         In order to provide coal fines to the Utah Plant,  the Company  entered
into a purchase  agreement  with  Earthco to acquire the NEICO coal  fines.  See
"ITEM 1.  BUSINESS--Supply  of Coal Fines--NEICO  Fines Purchase." The estimated
amount of clean coal fines  equivalent at the NEICO site is 2 million tons.  The
NEICO fines require  washing to remove ash and to otherwise  improve the quality
of the fines.  Hence the  Company is  constructing  of a wash plant at the NEICO
fines site.  The estimated cost of the wash plant is  approximately  $4 Million.
The  financing  for the  construction  of the wash  plant is being  provided  by
Gallagher,  and is evidenced by a promissory  note executed and delivered by the
Company  to  Gallagher  which is  secured  by the  property  purchased  with the
proceeds of the loan.  The  promissory  note bears interest at 6% per annum with
principal  and  interest  being due and  payable  in two  years.  As  additional
consideration to Gallagher for financing the wash plant, the Company, in October
1997,  agreed to grant  Gallagher  warrants  to purchase  approximately  400,000
shares of  Company  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 are  immediately  exercisable and
expire  in two  years.  The  Company  estimates  that  the  wash  plant  will be
operational in January 1998 and will be able to process approximately 80 tons of
clean fines per hour. If the wash plant operates at expected  capacity,  it will
provide  sufficient quality feedstock to operate the Utah Plant at its capacity.
As stated above,  and in accordance with the Supply and Purchase  Agreement with
Coaltech, the Company will provide the washed coal fines at its cost, which will
equal the amount  paid under the NEICO Fines  Purchase  agreement  plus  washing
costs.

         At the time the Company  commenced  construction  and  operation of the
Utah Plant there were  sufficient  clean coal fines held by third parties in the
general  area of the Utah  Plant  to  provide  sufficient  clean  feedstock  for
operating  the plant  without a wash plant  until the wash plant was  completed.
However,  the  clean  coal  fines  held by  third  parties  were  sold to  other
purchasers  leaving the Company  with no clean coal fines  source to service the
needs of the Utah Plant.  Without sufficient  quality feedstock,  the Utah Plant
has, therefore,  operated at well below its capacity,  processing  approximately
18,000 tons of synthetic  fuel all of which had a  relatively  high level of ash
and most of which has not been sold. Accordingly, the Company incurred a loss on
the  production  of  synthetic  fuel  product  at the Utah  Plant.  See "ITEM 7.
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATION."

                                        6
<PAGE>

         The  Company  has  experienced  problems  with  the  marketing  of  the
synthetic fuel product manufactured at the Utah Plant site. The Company believes
that the  marketing  problem is  principally  due to the high ash content in the
product which resulted from the use of low quality coal fines. Most users of the
synthetic fuel product are not capable of handling a product with high levels of
ash.  The Company  expects that the  marketing  problems for the product will be
resolved  once the  quality  of the coal  fines  used in the  processing  of the
product is improved.  The Company  believes this improvement will occur once the
wash plant is operational.

         The Company can give no  assurance  that the Utah Plant will produce at
capacity  once  the  Utah  Plant  and the  wash  plant  are  fully  operational.
Furthermore, the Company can give no assurance that the finished product will be
commercially marketable.

         License Agreements

         In December  1996,  the Company  entered into  agreements  with various
third  parties for the  licensing  of the  Briquetting  Technology.  In order to
qualify for Section 29  treatment,  the  facilities  that will be utilizing  the
Briquetting  Technology  are required to be placed in service no later than June
30, 1998.  While the Company may receive some advance  license fees, the Company
does not  expect  to  receive  the  majority  of the  licensing  fees  from such
agreements   until  after  the  facilities  have  been  placed  into  operation.
Additionally,  while the  Company  expects  several  facilities  to be placed in
service prior to June 30, 1998, some of the licenses  granted will likely not be
used since all of the  facilities  anticipated  to use the  licenses  may not be
constructed by June 30, 1998. There is no assurance that the facilities licensed
to use the Briquetting  Technology as described below will be in service by June
30, 1998.

         PacifiCorp.   In   December   1996,   PacifiCorp   Syn   Fuel,   L.L.C.
("PacifiCorp") entered into binding agreements with a third-party contractor for
the  construction  of six  facilities  in addition to the  Alabama  Plant.  Each
facility is designed to manufacture  approximately  360,000 tons  annually.  The
Company  entered into a license  agreement  with  PacifiCorp  for the use of the
Briquetting  Technology  at the  six  facilities  subject  to  the  construction
agreements.   PacifiCorp   subsequently  announced  the  construction  of  three
facilities,  with the construction of two single-line  synthetic fuel processing
facility located in Walker County,  Alabama and a single-line facility located
in  Tuscaloosa  County,  Alabama.  Under  the  terms of the  license  agreement,
PacifiCorp  will owe $1,000,000 in advance license fees and will pay a quarterly
license fee at a prescribed  amount (subject to annual adjustment for inflation)
times the Btu of product produced and sold during the quarter.  The Company will
also provide  binder at its cost plus a  prescribed  mark-up.  In October  1997,
PacifiCorp  determined  that it was not going forward with the  remaining  three
facilities for which it entered into binding contracts in 1996.

         The Company  can give no  assurance  that  PacifiCorp  will  ultimately
construct and qualify the three  facilities under Section 29, that the licensing
fees will be  received,  nor can  assurance  be given that the  facilities  will
operate at the estimated capacity.

         Gallagher.   In  December  1996,  AJG  Financial   Services,   Inc.,  a
wholly-owned subsidiary of Arthur J. Gallagher & Co. ("Gallagher"), entered into
binding  contracts with a third-party  contractor for the  construction  of four
facilities  in  addition  to the Utah  Plant.  Each  facility  has an  estimated
capacity of 360,000 tons annually.  The Company entered into a license agreement
with  Gallagher to utilize the  Briquetting  Technology at the four  facilities.
Gallagher has  indicated to the Company that it is  developing  the site for the
four  facilities,  has  ordered  the  necessary  equipment,  and  has  otherwise
proceeded with the construction of the four  facilities.  Under the terms of the
license and other financing  agreements with the Company,  Gallagher will pay an
advance  license fee in the amount of  $500,000  for each  facility,  subject to
certain conditions, and will pay a prescribed amount of royalty each quarter

                                        7
<PAGE>

(subject to annual adjustment for inflation),  based on the amount of Btu of the
product produced and sold during the quarter.  The Company will supply binder to
the four facilities at an amount equal to cost plus an agreed upon mark-up.

         The  Company  can give no  assurance  that  Gallagher  will  ultimately
construct and qualify the four  facilities  under Section 29, that the licensing
fees will be  received,  nor can  assurance  be given that the  facilities  will
operate at the estimated capacity.

         Pace Carbon Fuels, L.L.C. In December 1996, Pace Carbon Fuels,  L.L.C.,
a joint  venture  between C.C. Pace  Resources  and Carbon  Resources of Florida
("Pace"),  entered into binding contracts with a third-party  contractor for the
construction of four facilities,  having an estimated annual production capacity
of  approximately  600,000 tons per plant. In December 1996, the Company entered
into a license agreement with Pace for the use of the Briquetting  Technology at
these facilities.

         Pace has indicated to the Company that it is financing  and  developing
the projects through a limited partnership, Pace Carbon Synfuels Investors, L.P.
("LP").  Interests in the LP are being sold to third-party investors. The LP has
filed for and received a favorable PLR from the IRS. Three of the facilities are
anticipated  to be  constructed  in West  Virginia and one facility in Virginia.
Sale of interests in the LP are being  conducted  independently  by Pace and its
agent to qualified  investors.  The Company has not participated in, facilitated
or otherwise been involved in any part of the offering of interests in the LP by
Pace.

         Under the  license  agreements,  the  Company  will  receive an advance
license fee of $1.39 per ton of rated  capacity  payable upon  completion of the
financing of the  facilities,  but in no event later than  January 31, 1998.  In
addition, the plants will generate quarterly royalty fees measured by the amount
of Btu of the  project  produced  and sold times a  prescribed  license fee rate
(subject to annual  adjustment  for  inflation).  The Company  will also provide
binder material at the Company's cost plus an agreed upon mark-up.

         A licensee of the Company, CoBon Energy ("CE"),  introduced Pace to the
Company.  The Company entered into an agreement that provided that if CE did not
complete  projects with capacity of 1,500,000  tons,  some portion or all of the
royalties flowing from 500,000 tons of the Pace capacity would be payable to CE.
Given  the  projects  currently  under  development  by CE,  it is  likely  that
royalties on 500,000 tons will be payable to CE. See "ITEM 1. BUSINESS--Business
of the Company--Joint Ventures--CoBon Energy".

         The Company can give no assurance that Pace will  ultimately  construct
and qualify the four facilities, that the licensing fees will be received by the
Company,  nor can any assurance be given that the facilities will operate at the
estimated capacities.

         Savage  Mojave Plant.  In November  1996,  the Company  entered into an
agreement with Savage Industries  ("Savage")  whereby the Company agreed: (i) to
license the Briquetting  Technology to a limited liability company, to be formed
by Savage and Flyash Haulers,  Inc., for a monthly licensing fee based upon each
ton of qualified fuel produced, all relating to an upgraded briquetting facility
located in  Laughlin,  Nevada  (the  "Mojave  Plant");  (ii) to  provide  binder
material on a cost plus basis; (iii) to provide, upon request, coal fines to the
Mojave Plant; (iv) to provide technical  assistance to the Mojave Plant; and (v)
to reimburse to Savage, from the monthly license fees, an amount equal to 16% of
the cash  capital  required to upgrade the Mojave  Plant.  Savage  filed for and
received a favorable  PLR from the IRS with respect to this  project.  The plant
has an estimated  annual  capacity of 120,000 tons.  Based on status  reports by
Savage to the  Company,  the Company  expects to receive  monthly  license  fees
starting early 1998. No assurances can be made that Savage will be successful in
the production and sale of synthetic fuel. The agreement expires by its terms on
December 31, 2009.

                                        8
<PAGE>

         Pelletco  Corporation.  In September  1997, the Company  entered into a
license  agreement with Pelletco  Corporation  ("Pelletco"),  a  special-purpose
entity affiliated with Palmer Capital Corporation and Logan Capital Company. The
license is for up to six synthetic fuel projects with estimated  annual capacity
of 360,000  tons per plant.  Pelletco  had  entered  into  binding  construction
contracts  for the six projects  prior to December 31, 1996.  Under the terms of
the license agreement,  the net profits from the projects will be shared equally
by the Company and Pelletco.  The Company will also provide  binder  material to
the projects at the Company's cost plus an agreed upon mark-up.  The Company can
give no assurance that one or more of the plants will be  constructed,  that the
licensing fees will be received,  or that any facility that is constructed  will
operate at the estimated capacity.

         Joint Ventures

         Savage.  In November 1996,  the Company signed a primary  contract with
Savage to form up to two limited liability companies ("LLCs") to be owned 50% by
Savage and 50% by the  Company,  with each LLC  entering  into a  contract  with
Savage,  the  Company  and a qualified  third-party  contractor  for the design,
construction, start-up and certification of a synthetic fuel facility. Under the
terms of the agreement,  Savage was  responsible  for identifying and developing
the projects.  However,  these projects were not  sufficiently  developed in the
agreed  upon time  under the  contracts.  Accordingly,  these  projects  are not
proceeding  forward.  The Company's share of liquidated damages for not building
the facilities is $205,000,  payable in  installments  starting in November 1997
through June 1998, which liability has been recorded in the Company's  financial
statements for the fiscal year ended September 30, 1997.

         Ferro  Resources.  In December  1996,  the Company  together with Ferro
Resources, L.L.C. ("Ferro") as joint owners, entered into binding contracts with
a third-party contractor for the construction of two briquetting facilities with
a production capacity of 360,000 tons annually per plant. Under the terms of the
arrangement,  Ferro was to develop the  projects  and the Company was to provide
the Briquetting  Technology.  The net proceeds of the projects were to be shared
equally by the Company and Ferro. In April 1997, the beneficial  owner of Ferro,
Mr. Max E. Sorenson,  joined the Company as an executive officer.  See "ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS."  Subsequent to the 1997 fiscal
year-end, the Company entered into discussions with Mr. Sorenson to purchase the
membership  interests in Ferro for $10,000 plus a percentage  of income from the
projects constructed under the Ferro/Company  construction contracts.  Under the
proposed terms of the agreement,  Mr. Sorenson has the opportunity to receive up
to $1.5 Million over a period of up to ten years based upon performance  factors
of the  specified  projects.  The  Company's  purpose for entering  into such an
agreement is to obtain all right,  title and  interest in the two  Ferro/Company
construction  contracts.  Given the preliminary  nature of the discussions  with
Ferro,  the terms  described  above  may vary  from the terms of the  definitive
agreement, if consummated.

         The  Company  is  working  with  other  parties  in the  financing  and
developing  of the projects  that will be  constructed  under the  Ferro/Company
contracts.  If the  facilities  are not  constructed,  the Company is liable for
liquidated  damages  in the  amount  of 6% of the  maximum  contract  price,  or
approximately  $636,000 in total.  The Company  can give no  assurance  that the
facilities  will be constructed  or that, if  constructed,  the facilities  will
operate at estimated capacity.

         CoBon Energy. On January 30, 1996, the Company entered into a letter of
understanding  with CoBon Energy,  L.L.C.  ("CE"), a Utah professional  services
company based in Salt Lake City,  Utah,  to form five entities to  commercialize
and exploit the Briquetting Technology for the production of coal briquettes. In
August 1996, CE and the Company modified the letter of understanding.  Under the
modified letter of understanding,  the Company agreed to give CE a 1.6% interest
in AS #1, plus a license to use the  Briquetting  Technology for specified plant
locations up to an aggregate capacity of 1.5 million tons of synthetic fuel per

                                        9
<PAGE>

year. In consideration for the interest in AS #1 and the license, CE is required
to make a  one-time  payment  of (i)  $2.00  per ton for  annual  production  of
synthetic  fuel in the range of 500,001 to 1,000,000 tons and (ii) $2.50 per ton
for annual  production in the range of 1,000,001 to 1,500,000  tons.  The binder
material  for these  projects  will be  provided  by the  Company on a cost plus
basis.

         In December 1996, CE introduced Pace to the Company.  At that time, the
Company  entered  into an  agreement  with CE that  provided  that if CE did not
complete projects with aggregate annual capacity of 1,500,000 tons, some portion
or all of the  royalties  flowing from 500,000 tons of annual  production of the
Pace projects  would be payable to CE. Given the amount of estimated  tonnage of
projects  currently  under  development  by CE, it is likely that the  royalties
payable on 500,000 tons of capacity of Pace will be payable to CE.

         In December  1996, CE entered into binding  contracts for projects with
estimated annual capacity of at least 1.5 million tons in aggregate. CE has been
developing   several   different  sites  for  the  construction  of  briquetting
facilities.  On November 14, 1997, the Company entered into an agreement with CE
to provide  financing  for the ordering of necessary  equipment for a CE project
with an estimated annual production  capacity of 680,000 tons and other services
in  exchange  for a  percentage  of  the  annual  proceeds  from  such  project.
Approximately  $400,000 has been advanced by the Company  under this  financing.
The Company can give no assurance that any CE facilities will be constructed and
placed in  service  prior to June 30,  1998 or that any fees will be paid to the
Company pursuant to the agreement as described above.

         Geneva Plant.  In May 1995,  the Company  entered into a  collaborative
agreement with Geneva Steel Company ("Geneva") to build and operate a commercial
iron revert  briquetting  plant in  Vineyard,  Utah (the "Geneva  Plant").  That
agreement was amended and restated in May 1996.  Currently,  the Geneva Plant is
not  operational  and  the  Company  is a  tenant-at-will  with  respect  to the
facility.  The Company no longer  expects the Geneva Plant to be used as an iron
revert  briquetting  facility at the Geneva  site.  In addition to its use as an
iron  revert  briquetter,  the  Company  has also used the  Geneva  Plant in the
briquetting of coke breeze and synthetic fuel made from coal fines.  In December
1996,  the  Company  entered  into a binding  contract to install a dryer in the
Geneva Plant that would allow for the operation of the plant as a synthetic fuel
manufacturing  facility.  The  Company  plans to use the  Geneva  Plant  for the
production of synthetic fuel, subject to the termination of the lease by Geneva.
No assurance  can be given that the Geneva Plant will be operated as a qualified
synthetic  fuel  facility or that the Geneva  Plant will be capable of operating
profitability either in the briquetting of synthetic fuel or iron revert.

         Other Construction Agreements

         In December 1996, in addition to the contracts previously described and
explained,  the Company  entered into eight design and  construction  agreements
(the "1996  Construction  Agreements")  for the design and construction of eight
new synthetic fuel facilities each having capacity of approximately 360,000 tons
per year.  Depending upon the specific  agreement,  the contractor is either The
Industrial Company ("TIC"), CEntry Constructors,  L.C. or Centerline Engineering
Corporation  ("Centerline"),  a Lockwood Greene Company.  The 1996  Construction
Agreements,  among other things, require that the plants be placed in service by
June 30,  1998.  An advance  payment of  $250,000 is due at the time a notice to
proceed  is issued  by the  Company  (or its  assignee).  The 1996  Construction
Agreements may be terminated at the Company's option with a penalty of 6% of the
total contract price.  If the Company is unsuccessful in obtaining  financing or
otherwise  fails to  construct a facility,  the 6% penalty  would be owed to the
contractor.

         AT  Massey/Fluor  Corporation.  The  Company  has  assigned  two of the
construction   contracts   with   Centerline  to   Appalachian   Synfuel  L.L.C.
("Appalachian"),  a wholly-owned subsidiary of Fluor Corporation.  The notice to

                                       10
<PAGE>

proceed has been issued on the two contracts.  The facilities will be built as a
double-line  solid synthetic fuel  agglomeration  facility to be located at A.T.
Massey Coal  Company,  Inc.'s  ("AT  Massey")  Marfork  Prep Plant Site in Boone
County, West Virginia. The double-line facility is expected to have an aggregate
annual  capacity  of  approximately   720,000  tons.  In  conjunction  with  the
assignment of the two contracts,  the Company  entered into a license  agreement
with Appalachian for the use of the Briquetting Technology. Under the agreement,
the Company  will be paid an advance  license fee of $1 Million,  with  $250,000
payable upon execution of the license agreement and the balance payable upon the
receipt by  Appalachian  of a PLR, if applied for, or upon the  satisfaction  of
certain  conditions if the PLR is not applied for. A quarterly  license fee will
also be paid at a prescribed  amount  (adjusted  annually for inflation) for the
Btu  of  product  that  is  produced  and  sold  up to a  prescribed  amount  of
production.  The Company also granted to Appalachian the right to pay a lump sum
payment for the facilities,  in lieu of quarterly  license fees over the term of
the  agreement.  The Company will provide  binder to the facility on a cost plus
basis.  The  agreement is subject to other  conditions  including the payment of
$300,000 to Appalachian if the facilities are not constructed.  No assurance can
be given that  Appalachian will construct and qualify the facilities for Section
29 treatment or that the plants will be operated at the estimated capacity.

         Major  Utility.  The Company has entered into a  non-binding  letter of
interest to sell one synthetic  fuel  facility to  Mountaineer  Synfuel,  L.L.C.
("Buyer"), a Delaware limited liability company and a wholly-owned subsidiary of
a major utility, and is in discussions  regarding the sale of a second facility.
The agreement is subject to numerous  conditions,  including but not limited to,
the  obtaining  of a PLR from the IRS,  the  production  of a product that meets
certain specifications,  the obtaining of necessary permitting, and the securing
of coal fines  sources.  There is no  assurance  that the parties  will reach an
agreement  with  respect to the sale of this  facility.  The Company has entered
into an interim  construction  financing agreement with this Buyer to finance up
to $1  Million  for the  Company's  purchase  of  equipment  and  other  project
development  costs relating to other  facilities  described  immediately  above.
Approximately $560,000 has been advanced under this agreement with such advances
occurring after the Company's fiscal 1997 year end. The Company's  obligation to
repay the  amounts  borrowed  is secured by the  collateral  purchased  with the
proceeds  of the  financing.  Interest  accrues on the amount  advanced at a per
annum rate equal to the LIBOR rate plus 1% payable monthly  commencing  December
1, 1997. The principal  amount of the financing is payable upon the closing of a
take-out  construction  loan or December 31, 1998,  whichever  occurs first. The
construction financing will be applied against the purchase of the facilities if
the Buyer elects to buy or will be repaid over time on terms and  conditions  to
be determined in a definitive  construction financing agreement to be negotiated
by the  parties.  Under the terms of the  non-binding  letter of  interest,  the
Company will provide use of the Briquetting Technology and the Buyer, subject to
entering  into a  definitive  agreement,  will pay an advance  license fee of $1
Million per plant upon completion of the plant and purchase by Buyer.  The Buyer
will also pay a  quarterly  license  fee  determined  by taking the product of a
prescribed  amount  (adjusted  annually  for  inflation)  times  the  Btu of the
synthetic  fuel product  produced and sold during the quarter.  The Company will
also supply binder material to the project on a cost plus basis. With respect to
the additional site under discussion with the Buyer,  which facility is commonly
referred to as  Pocahontas  Synfuel  ("PS"),  the  Company  has given  notice to
proceed and has commenced construction. The plant is located in McDowell County,
West  Virginia and is expected to have an annual  capacity of 360,000  tons.  In
addition to the  synthetic  fuel  facility,  a wash plant is also being built to
provide cleaned coal fines to the project. In the event no agreement is reached,
the Company will attempt to arrange  alternative  financing for the construction
of the facility or an alternative buyer.

         If the facilities are not constructed, the Company will be subject to a
penalty  in the  amount  of  approximately  $318,000  per  plant.  See  ITEM  1.
BUSINESS--Business   of  Company--Other   Construction   Agreements-Construction
Penalties."  The  Company  can give no  assurance  that the Buyer  will elect to
purchase one or both of the facilities,  that the facilities will be constructed
and qualified under Section 29 prior to June 30, 1998, or that the production of

                                       11
<PAGE>

the facilities will be at the estimated annual capacity.  If the Company reaches
a  definitive  agreement  regarding  the  sale  of one or  both  synthetic  fuel
facilities to the Buyer, the terms of such sale will be disclosed.

         Other  Construction  Contracts.  Four  additional  projects  are  being
developed by the Company with various other parties.  Due to various  conditions
and  requirements,   including  but  not  limited  to,  securing  the  necessary
financing, required permits, adequate fines sources and end product users, there
can be no  assurance  given that these  projects  will be  constructed  so as to
qualify for Section 29 or that, if  constructed,  the facilities will operate at
the estimated capacity.

         Construction Penalties.  Each of the construction contracts provide for
a 6% penalty if the construction is not pursued by the Company.  The Company has
accrued as a liability the 6% penalty  (approximately  $1,272,000) that would be
due if four  of the  facilities  are  not  constructed  under  the  construction
agreements as the Company  believes that it is probable four facilities will not
be constructed.

         Indemnification  to Centerline.  In December 1996, the Company  entered
into six  indemnification  agreements with Centerline whereby the Company agreed
to  indemnify  Centerline  should it be  required to pay  liquidated  damages to
PacifiCorp  under  various  design  and  construction  agreements  for six  coal
agglomeration  facilities.  See "ITEM 1.  BUSINESS--Business of Company--License
Agreements--PacifiCorp."  Under the  original  terms of the  various  design and
construction  agreements,  if the  facilities  are 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 applies if PacifiCorp actually
decides  to  build  the  facilities  with  Centerline  as  the   design/builder.
PacifiCorp  has elected to not build three of the  projects,  and  therefore the
indemnity  agreement  with respect to those  facilities  will not longer  apply.
Accordingly, the maximum amount of contingent liability to the Company under the
indemnification  agreements is $2,250,000  ($750,000 per design and construction
agreement).

         Supply of Coal Fines

         The  Company  uses coal fines to  produce  synthetic  fuel  briquettes.
Accordingly, supply of coal fines is essential to the feasibility of a synthetic
fuel  briquetting  facility.  In selecting  sites for  briquetting  plants,  the
Company  considers  the  availability  of coal  fines  near the  plant  site and
attempts to secure  sufficient coal fines to operate its plants at capacity.  In
so doing,  the  Company  generally  attempts  to  contractually  arrange for the
purchase of coal fines prior to the construction of briquetting  facilities.  In
addition,  the Company may in certain  instances be  contractually  obligated to
provide coal fines to the purchaser of a synthetic fuel facility.

         K-Lee Supply  Agreement.  In September 1996, the Company entered into a
supply agreement with K-Lee  Processing,  Inc. and Concord Coal Recovery Limited
Partnership  for a continuous  supply of coal fines to the Alabama Plant.  Under
this agreement, the Company is obligated to purchase a minimum of 20,000 tons of
coal fines per month  through  December 1, 2001, at a fixed price per ton during
the first year  (subject to  adjustment  for moisture  and ash content)  with an
escalating price  thereafter.  This agreement will be assigned by the Company to
BSF at the closing of the sale of the Alabama Plant to BSF.

         NEICO Fines  Purchase.  In February  1997,  the Company  entered into a
contractual  arrangement with a non-affiliated  party,  Earthco,  to acquire the
NEICO  coal  fines and to  conduct  recovery  and  preparation  activities  at a
location  near  Wellington,  Utah  (approximately  six miles from the Utah Plant
site).  The  estimated  quantity  of clean  coal fines at this site is 2 million
tons.  Total  obligations  to  acquire  the fines are  approximately  $5,500,000
between February 1997 and May 2002, of which $750,000 was paid upon execution of
the agreement. During the fiscal year, the Company made an additional payment of
approximately $396,000. Other than relatively minor amounts used in start-up

                                       12
<PAGE>

production at the Utah Plant,  these fines are available for future  production.
Accordingly,  the Company has accounted for the payments made to date as advance
payments for inventory.  The Company will reflect in inventory the cost for such
fines as they are processed into clean coal fines.

         Black Diamond Enterprises  Agreement.  In May 1997, the Company entered
into an  arrangement  with  Black  Diamond  Enterprises,  Inc.  ("BDE")  for the
purchase of coal fines in McDowell County, West Virginia. The fines will require
washing and will service the feedstock needs of the synthetic fuel facility that
is being  constructed near Northfork,  West Virginia,  under the name Pocahontas
Synfuel.  See  ITEM 1.  BUSINESS--Business  of the  Company--Other  Construction
Agreements--Major  Utility." The agreement  provides that BDE will supply washed
coal fines with certain  specifications  at a prescribed  price which includes a
percentage  of the net proceeds  received by the Company  from the project.  The
agreement also gives BDE certain rights to market the synthetic fuel produced at
the site.

         Other Contracts

         Port Hodder.  In September  1996,  the Company  entered into a purchase
agreement with E. J. Hodder and  Associates,  Inc. for the purchase of a certain
land  leasehold  interest and equipment  consisting of a barge loading  facility
servicing  the Warrior River located at the Alabama  Plant.  The total  purchase
price for the facility is $927,000  consisting  of $342,000 in cash and $585,000
of Company  common  stock.  The land lease  commenced  on  September 1, 1996 and
expires,  with  extensions,  on May 23,  2006.  The  Company  intends to use the
facility in connection with the operations of the Alabama Plant.

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

         AGTC. In  accordance  with an April 1996 letter  agreement  between the
Company and AGTC, a partnership formed by AGTC, Inc., Alpine Coal Company,  Inc.
and E. J. Hodder & Associates,  Inc.,  AGTC was engaged by the Company on a best
efforts basis, to investigate,  identify and participate in the selection of (i)
project  sites for the  construction  of suitable coal  extrusion  manufacturing
facilities for the Company, (ii) suitable coal fines reserves and (iii) suitable
users or consumers  of the coal  product  produced.  The  compensation  for such
services  consisted of a monthly  retainer of $35,000 and a  commission.  In the
fourth month  following  the  execution of the letter  agreement a dispute arose
among the parties  regarding  AGTC's  performance and compensation due under the
agreement.  Accordingly,  the Company  terminated the agreement  pursuant to its
terms.  AGTC  subsequently  claimed that it was entitled to a commission  on the
proposed sale of the Alabama Plant. The Company, based on the advice of counsel,
believes that AGTC's claim has no merit.

Briquetting Technology

         The Company has developed a special binding  formula,  which allows for
the production of high-grade  briquettes which withstand degradation both during
shipment and the burn cycle. In simplified  terms,  in the briquetting  process,
the material to be briquetted may be washed to remove  impurities.  The material
is then  mixed with  binding  agents and fed into a  briquetter,  pelletizer  or
extruder which  utilizes  pressure to combine the feed material into a briquette
having the desired shape, size and density. Briquettes are then dried to achieve
maximum  strength.  Cured  briquettes  are expelled  onto a continuous  belt for
handling and storage.

                                       13
<PAGE>

         Substantially  all the equipment and machinery used in the  briquetting
process are commercially  available.  The Company has arrangements  with certain
manufacturers  for the supply of certain  equipment and machinery to be included
in synthetic fuel facilities  currently  under  construction or that it plans to
construct by June 30, 1998. However,  there can be no assurance that the Company
will  be able  to  acquire  all  necessary  equipment  and  machinery  on  terms
acceptable  to the Company in  sufficient  time to complete and place in service
the synthetic fuel facilities.

Proprietary Protection

         The Company has received four current United States patents and has one
United  States  patent   application   pending  and  two  international   patent
applications  pending  under the  Patent  Cooperation  Treaty  covering  certain
aspects of the Briquetting Technology. There can be no assurance as to the scope
of  protection  afforded by the patents.  Moreover,  there are other  industrial
waste recycling  technologies  in use and others may  subsequently be developed,
which do (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  against patents held by other parties
or that  the  Company  will  have  the  resources  to  enforce  any  proprietary
protection afforded by the patent or defend against an infringement claim.

         In addition  to patent  protection,  the  Company  also relies on trade
secrets and  know-how  and employs  various  methods to protect the  Briquetting
Technology.  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 the Company's  know-how,  concepts,  ideas and  documentation.
Since the  Company's  proprietary  information  is  important  to its  business,
failure to protect its trade secrets may have a material  adverse  effect on the
Company.

Coke and Revert Material Briquettes

         The Company  will seek to enter into  collaborative  arrangements  with
steel and coke producers to build, equip and operate  briquetting plants on-site
at the producers'  facilities.  The Company believes that such arrangements will
benefit both the Company and steel and coke  producers  because  they will:  (i)
provide the Company with an ongoing supply of inexpensive coke breeze and revert
materials  while  ensuring a ready customer for the  briquettes  produced;  (ii)
provide the steel or coke producer with an economical  means to dispose of waste
materials  while  providing a ready source of briquettes  and/or iron feedstock;
and (iii) minimize transportation costs for waste by-products, raw materials and
briquettes,  thereby  increasing the economic  competitiveness  of the Company's
products.  There is no assurance  that such  arrangements  will be profitable or
that the  Company  will be able to enter into  arrangements  with steel and coke
producers or to obtain the funding necessary to construct such plants.

         Greystone  Joint  Venture.  In June 1995,  the Company  entered  into a
license  agreement  (the  "Greystone  Joint Venture  Agreement")  with Greystone
Environmental  Technologies,  Inc.  ("Greystone")  to form a 50/50 joint venture
(the  "Greystone  Joint Venture") to  commercialize  and exploit the Briquetting
Technology  for the  production  of coke and  revert  material  briquettes.  The
Greystone Joint Venture has an exclusive world-wide license to commercialize and
exploit the  Briquetting  Technology for the production of coke briquettes and a
license  to  commercialize  and  exploit  the  Briquetting  Technology  for  the
production  of revert  material  briquettes  in the  Alabama  and Gary,  Indiana
regions.

         In accordance  with the Greystone  Joint Venture  Agreement,  Greystone
made an initial  payment of $100,000 to the  Company,  and was  required to make
additional  payments out of profits or capital of the  Greystone  Joint  Venture
until a total  aggregate  of  $500,000  had  been  paid to the  Company  for the
license. Greystone has failed to make the additional payments required under the

                                       14
<PAGE>

Greystone Joint Venture Agreement and, accordingly, has received notice from the
Company that an event of default has occurred  thereunder.  The Company believes
that an uncured  event of default under the  Greystone  Joint Venture  Agreement
results in a termination of the license.  However,  Greystone has indicated that
it believes  the  Greystone  Joint  Venture  Agreement  is still in effect.  The
Company  currently has no coke or revert  briquetting  operations and expects to
resolve this issue before any significant operations are begun.

Research and Development

         The Company has devoted significant research and development efforts to
the  refinement  and  commercialization  of  the  Briquetting  Technology.   The
Company's  research and  development  expenses  were  approximately  $1,265,000,
$1,044,000  and $663,935  for years ended  September  30,  1995,  1996 and 1997,
respectively.  The Company at the  present  time is focusing  its  research  and
development  efforts  principally upon its synthetic fuel binder with the intent
of  enhancing  the binding  and other  characteristics  of the binder  and/or to
further  reduce  binding  process costs.  The Company is also  developing  other
related  technologies that could be implemented in steel mills and other mineral
industries.

Construction and Limestone Businesses

         In order to generate cash flow to support  research and development for
the  Briquetting  Technology,  in 1993 the Company  acquired IME, State and CIC,
three construction  companies engaged in providing  contracting and construction
services to heavy  industry.  In addition to the foregoing,  in 1994 the Company
acquired Larson, which provides limestone products for industrial  applications.
(These companies are collectively referred to as the "Construction Companies.")

         In September  1995, the Company made a strategic  decision to focus its
efforts exclusively on commercializing the Briquetting  Technology and to divest
itself of the Construction  Companies.  On February 1, 1996, the Company entered
into a Stock Purchase Agreement (the "Agreement") with Michael McEwan and Gerald
Larsen ("Buyers"),  former principals of the Construction Companies, to sell all
of the  common  shares  of  the  Construction  Companies  to  the  Buyers  for a
$5,000,000 face value 6% promissory note (the "Note").  Mr. McEwan is the son of
Lloyd C.  McEwan,  a former  director of the  Company.  The Buyers  subsequently
raised various contentions regarding the original Note and the Agreement. During
the past  fiscal  year,  the Company  has  negotiated  and has agreed to certain
modifications to the original terms of the sale of the  Construction  Companies.
Under the modified agreement, the interest on the Note is waived through January
31,  1998.  Thereafter,  annual  payments of $514,814 are to be made January 31,
1999 through  January 31, 2004. A final  payment in the amount of  $3,711,701 is
due January 31, 2005. The Note is guaranteed by the Buyers and is collateralized
with 130,000 shares of the Company's common stock and 50,000 options to purchase
the Company's  common stock with a strike price of $1.50 per share.  The Company
retains  responsibility for certain retirement  payments to a prior construction
company  officer  and certain  lease  obligations  relating to the  Construction
Companies.  In  satisfaction  of  payments  made on behalf  of the  Construction
Companies  by the  Buyers  that were  attributable  to the  period  prior to the
effective  date of the sale,  the Company  transferred  ownership  of its office
building, subject to related debt, to the Buyers. See "ITEM 2. PROPERTIES."

                                       15
<PAGE>

Government Regulation

         The Company's present and proposed  briquetting  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 its briquetting  plants,  the Company will be required to obtain various
state and local permits.  The Company has obtained all permits required to date,
believes  that  it will be able to  obtain  future  permits  without  inordinate
difficulty or expense and that it is in substantial compliance with all material
laws and regulations governing the briquetting operations.  The Company believes
that  environmental  compliance  for new  briquetting  plants  will  not  entail
significant costs. However, the Company's briquetting operations may entail risk
of  environmental  damage and the  Company may incur  liabilities  in the future
arising  from the  discharge of  pollutants  into the  environment  or its waste
disposal practices.

         Failure  to  obtain   necessary   permits  to  construct   and  operate
briquetting  plants could have a material  adverse effect on the Company.  Other
developments,  such as the enactment of more  stringent  environmental  laws and
regulations,   could   require   the  Company  to  incur   significant   capital
expenditures.  If the  Company  does  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 the Company.

         The Company's  construction and limestone products businesses were also
governed  by  extensive   environmental   and   occupational   safety  laws  and
regulations. The Company believes that it was in substantial compliance with all
such material laws and regulations  while it owned the  Construction  Companies.
There can be no  assurance  that  failure  to comply  with  applicable  laws and
regulations,  whether in existence  or  subsequently  enacted,  would not have a
material adverse effect on the Company.

Tax Credits

         Section 29 of the Code  provides a credit  (the  "Section  29  Credit")
against the regular  federal income tax,  measured by unrelated party sales by a
taxpayer of qualified  fuels,  including  solid  synthetic  fuel produced in the
United  States  from  coal,  the  production  of  which is  attributable  to the
taxpayer.  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.

         In order to be a solid  synthetic  fuel produced from coal for purposes
of the  Section  29 Credit,  the  produced  fuel must  differ  significantly  in
chemical composition,  as opposed to physical composition,  from the alternative
substance  used to produce it. The  Company  has  received a PLR from the IRS in
which the IRS, based on representations  made to it by the Company,  agrees that
the  Briquetting  Technology  results in a significant  chemical  change to coal
fines and transforms  them into a solid  synthetic fuel, and accordingly the IRS
concludes,  based on the facts presented to it, that: (i) the Company,  with the
use of its patented  process,  produces a "qualified fuel" within the meaning of
Section  29(c)(1)(C)  of the Code; and (ii) assuming the other  requirements  of
Section 29 are met, the sale of the "qualified fuel" will entitle the Company 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 will 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 certain criteria are satisfied,  including that
(i) there has been no misstatement or omission of material facts, (ii) the facts
at the time of the  transaction  are not materially  different from the facts on
which the PLR was based,  (iii) there has been no change in the applicable  law,
(iv) the PLR was originally issued for a proposed transaction and (v) the

                                       16
<PAGE>

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.  The
Company  received its PLR in September  1995.  At least three other similar PLRs
have been obtained by third parties in connection with licenses of the Company's
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 $3.00 in 1979  dollars  (or $5.95 in
1996  dollars) for each oil barrel  equivalent  ("OBE") of the  qualifying  fuel
produced  and sold.  This  equates  to  approximately  $20.00-$28.00  per ton of
synthetic  fuel  briquettes.  The OBE is defined  generally as an amount of fuel
having a 5.8 million Btu content.  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 phaseout
(under an annually  adjusted  formula) after the  unregulated  oil price reaches
specified  levels.  In 1996  dollars,  the credit  would have phased out had the
reference  price for oil exceeded  $46.62 per barrel,  but the  reference  price
determined for 1996 was $18.46 and no phaseout  occurred.  There presently is no
reference price for 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.

         Section  29  of  the  Code  contains  no  provision  for  carryback  or
carryforward of Section 29 Credits.  Once earned,  however,  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 by December 31, 2007 to the
extent  attributable to production from facilities placed in service by June 30,
1998,  provided  that such  facilities  are  constructed  pursuant  to a binding
written contract in effect by December 31, 1996.

         On February  6, 1997,  the  Treasury  Department  released  the General
Explanations of the Administration's Revenue Proposals, which summarized the tax
related  provisions from the President's  Fiscal Year 1998 Budget  submission to
Congress  (the  "Federal  Budget").  The initial  version of the Federal  Budget
proposed  that  the  placed-in-service  date be  changed  to June  30,  1997 for
facilities  constructed  under  binding  contracts  entered  into  on or  before
December  31, 1996.  On August 5, 1997,  President  Clinton  signed the Taxpayer
Relief Act of 1997 (the "Act").  The Act did not include the proposed  change to
Section 29. Hence,  the June 30, 1998 deadline for placing in service  synthetic
fuel plants remains intact.

Competition

         The  Company  may  experience   substantial   competition   from  other
alternative fuel technology  companies,  as well as companies that specialize in
the disposal and recycling of waste products  generated by steel,  coal and coke
production.   Many  of  these  companies  have  greater  financial,   technical,
management and other resources than does the Company.  The Company believes that
key factors in its ability to compete will be the quality of its briquettes and

                                       17
<PAGE>

their  pricing  compared  to other  sources of coal,  coke and scrap  iron.  The
Company anticipates that it will be able to compete  effectively  although there
can be no assurance that it will do so successfully.

Employees

         The  Company  currently  employs  approximately  40 persons  full-time.
Approximately 17 of such persons are in corporate administration,  and 23 are in
briquetting operations,  including research,  development and marketing. None of
such employees are covered by a collective bargaining  agreement.  In connection
with the  establishment  and operation of a briquetting  plant where the Company
retains responsibility for the operations, the Company will seek to hire between
eight to ten persons per plant.

Confidentiality Provisions

         As part of its business,  the Company  typically enters into agreements
concerning its projects which contain  confidentiality  provisions.  The Company
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,  as  amended.  Moreover,  disclosure  of such
agreements may be required in connection with the Company's private placement of
securities.  Notably,  some  of the  agreements  do  not  contain  the  standard
exceptions for the  disclosure of information  which is required to be disclosed
under law.  Accordingly,  no  assurances  can be given that the  Company has not
inadvertently  disclosed information regarding its various projects in violation
of confidentiality covenants entered into by the Company.

Forward Looking Statements

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

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

                                       18
<PAGE>

         (ix) Ability to meet financial  commitments under existing  contractual
arrangements.

ITEM 2.  PROPERTIES

         The Company leases an approximately 5,000 square-foot building in Lehi,
Utah, which houses its executive offices ("Corporate Headquarters"). The Company
previously  owned its  Corporate  Headquarters.  However,  in August  1997,  the
Company  sold its  Corporate  Headquarters  to Michael  L.  McEwan and Gerald M.
Larson ("Buyers") and entered into a triple-net lease with Buyers,  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 Lease will  automatically  extend  indefinitely  for successive
one-year  periods at the sole option of the  Company,  and the monthly rent will
increase by 5% per year. The Corporate  Headquarters  were transferred to Buyers
as part of the settlement and closing between the Company and the Buyers for the
sale of the  Construction  Companies.  See "ITEM 1.  BUSINESS--Construction  and
Limestone Businesses."

         In October  1997,  the  Company  purchased  an 8,000  square-foot  site
located in Price,  Utah, on which the Company's  prototype  briquetting plant is
located,  for $150,000.  Included in the purchase was a 1,400 square-foot office
building which houses  equipment.  The property is subject to a 10-year $100,000
mortgage  held by the seller.  The equity in the property was pledged as part of
the collateral for a $2.9 Million loan to the Company from Gallagher.  See "ITEM
7.  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources--Existing Debt Arrangements."

         In May 1995, the Company entered into a lease with Geneva Steel Company
for a 9,000  square  foot  building  in  Vineyard,  Utah  as part of the  Geneva
Agreements   described  in  "ITEM  1.   BUSINESS--Business   of   Company--Joint
Ventures--Geneva  Plant." The Company pays no cash rent on these facilities. The
purpose of the lease is to allow the Company to apply the Briquetting Technology
to Geneva's coke breeze and iron revert  materials.  Subsequent to the execution
of  the  Geneva  Agreements,  the  lease  with  Geneva  expired  resulting  in a
tenancy-at-will  between  the  parties.  The  Company  intends to use the Geneva
briquetting  facility in the manufacture of synthetic fuel at the Geneva site or
some  other  location.   See  "ITEM  1.   BUSINESS--Business  of  Company--Joint
Ventures--Geneva Plant."

         As part of the  acquisition  of the Port Hodder  facility,  the Company
entered  into a land lease for the Alabama  Plant of  approximately  15.45 acres
with  a  non-affiliated  party  for  an  annual  rental  of  $1.  See  "ITEM  1.
BUSINESS--Business  of the Company--Other  Contracts--Port  Hodder." The Alabama
Purchase Agreement provides for the assignment of this property to PacifiCorp as
part of the sale of the Alabama Plant.  See "ITEM 1.  BUSINESS--Business  of the
Company--Alabama Plant."

         In June 1996, the Company entered into a land lease of approximately 12
acres in Price,  Utah with a  non-affiliated  party at a monthly rental of $600.
The land is the site on which the Utah  Plant was  constructed.  The lease  term
commenced on June 20, 1996 and expires on December 31, 2007 but may be extended.
See "ITEM 1.  BUSINESS--Business  of the Company--Utah  Plant." In October 1996,
the Company commenced  construction on the land of a 22,000 square-foot building
to house the Utah Plant.  In March 1997, this building was leased by the Company
to Coaltech as part of the sale of the Utah Plant. However, the Company retained
responsibility  for  operations of the property  pursuant to an  Operations  and
Maintenance  Agreement  between  the  Company  and  Coaltech.  The  Company  has
constructed  two  ancillary  buildings  to the Utah Plant,  a 1,650  square-foot
binder  plant and a 3,400  square-foot  wash  plant.  If the  Company  elects to
construct a second line at the Utah Plant  location,  Coaltech has the option to
acquire the second line. In addition,  the option includes the purchase of other
equipment   and   the   building    housing   the   Utah   Plant.    See   "ITEM
1.BUSINESS--Business of the Company--Utah Plant."

                                       19
<PAGE>

In  February  1997,  the  Company  purchased  the NEICO  coal  fines  containing
approximately 2 million tons of coal fines from a non-affiliated party, Earthco.
The fines are located at a site  approximately six miles from the Utah Plant. In
conjunction with the coal fines purchase, Earthco granted to the Company a lease
of the property whereon the fines are located.  The leased property  consists of
two parcels,  consisting of approximately  30 acres and 357 acres  respectively.
Under the terms of the agreement,  the Company will pay $5,500,000 for the fines
with  further  adjustments  if fines  in  excess  of the  estimated  amount  are
recovered.  The  Company  has the option to purchase  the  property  under lease
subject   to   certain   conditions.   See   "ITEM  1.   BUSINESS--Business   of
Company--Supply of Coal Fines--NEICO Fines Purchase."

ITEM 3.  LEGAL PROCEEDINGS

         On June 5, 1997,  Brandt  Filtration  Group,  Inc.  ("Brandt")  filed a
complaint  against the Company in the State Court for Gwinnett County,  State of
Georgia. The plaintiff also named Pacific Power & Light Company ("Pacific") as a
defendant.  The plaintiff  sought  $160,340 plus other  unspecified  damages and
legal expenses.  The complaint  alleges that the Company  breached a contract to
purchase air filtration  equipment for the Alabama Plant from Brandt and further
alleges that the Company acted as agent for Pacific.  Pacific removed the action
to the United States District Court for the Northern  District of Georgia (Civil
Action No. 1:97-CV-2018).  On September 15, 1997, Brandt and the Company entered
into a settlement  agreement  whereby the Company  agreed to pay an aggregate of
$156,964  ($122,111 plus  cancellation  charges of $34,253) and Brandt agreed to
dismiss all of its claims in the lawsuit with prejudice.

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

         In January  1996, a manager of the Company  entered  property  owned by
NEICO, a subsidiary of Nevada Power Corporation,  in connection with an offer by
the Company to purchase the property,  and with certain  other  employees of the
Company,  removed and contained over a two-day period some asbestos. The manager
allegedly failed to follow federal guidelines governing the handling and removal
of asbestos.  This action was reported to the Division of Environmental  Quality
for the State of Utah. An investigation  followed in which the Company was fined
approximately  $11,000 and was required by the State of Utah to properly dispose
of the asbestos using a qualified asbestos removal company. In the fall of 1997,
the Environmental  Protection Agency began a review of the case and is currently
looking into the  advisability  of further  claims or fines  against the manager
and/or against the Company.

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

                                       20
<PAGE>

was filed in the  Superior  Court of  California,  County  of  Orange  (Case No.
776083).  The Company intends to defend the suit.

         On January 30, 1997, S.C.  Marketing,  Inc., a California  corporation,
filed a civil complaint  against the Company  alleging breach of contract in the
amount of $137,440 plus damages.  The complaint was filed in the Superior  Court
of  California,  County of Orange  (Case No.  774760).  On March 26,  1997,  the
Company entered into a settlement agreement with S.C. Marketing, Inc. whereby it
issued 20,913 shares of Company common stock in payment of a previously  accrued
liability in settlement of the complaint.

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

         None.

                                     PART II

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

         The shares of common stock of the Company are listed for trading on the
OTC Bulletin Board under the symbol "CVOL."

         On October 29, 1997, the Company  submitted an Application  for Initial
Inclusion on the Nasdaq  National Market System.  While the Company  believes it
meets the quantitative  requirements for inclusion on the Nasdaq National Market
System, the Company does not know what, if any, qualitative  requirements may be
applied by Nasdaq and there is no assurance that the Company's  application will
be granted by Nasdaq.

         The following table sets forth, for the periods presented, the high and
low bid  quotations  for the common  stock as  reported  by  National  Quotation
Bureau,  Inc. during the three most recent calendar years. The quotations do not
reflect  adjustments for retail mark-ups,  mark-downs or commissions and may not
necessarily represent actual transactions.  Since the Company 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.

                                       21
<PAGE>
                                    Low Bid          High Bid

         Calendar 1995
         First Quarter              $ 1.25           $ 3.75
         Second Quarter             $ 1.25           $ 3.875
         Third Quarter              $ 3.00           $ 7.50
         Fourth Quarter             $ 5.00           $21.25

         Calendar 1996
         First Quarter              $18.00           $31.50
         Second Quarter             $ 9.50           $22.25
         Third Quarter              $ 6.50           $10.75
         Fourth Quarter             $ 7.50           $14.375

         Calendar 1997
         First Quarter             $ 7.875          $15.75
         Second Quarter            $ 6.75           $ 8.875
         Third Quarter             $ 6.25           $10.125
         Fourth Quarter(*)         $ 8.875          $13.625
         ---------------
         (*) Through December 15, 1997

         Effective  June 14,  1995,  the Company  implemented  a  one-for-twenty
reverse stock split. The Company  implemented a two-for-one  forward stock split
effective January 23, 1996. The bid prices set forth above have been adjusted to
reflect the effect of the stock splits.

         As of December 15, 1997, there were 673 record holders of the Company's
outstanding shares of common stock.

         The Company has not paid  dividends  to date and does not intend to pay
dividends in the foreseeable future. The Company intends to retain earnings,  if
any,  to finance the  development  and  expansion  of its  business.  Payment of
dividends  in the future will depend,  among other  things,  upon the  Company'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 the Company within
the past fiscal year without registering the securities under the Securities Act
of 1933, as amended.  No  underwriters  were involved in any stock issuances nor
were any commissions or similar fees paid in connection therewith.  However, the
Company  did pay  finders  fees in the  form  of  cash,  stock  or  warrants  in
connection with various securities issuances.

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

         The Company  believes that the following  issuances of shares of common
stock, notes, debentures and other securities were exempt from the registration

                                       22
<PAGE>

requirements  of the  Securities  Act  of  1933,  as  amended,  pursuant  to the
exemption  set  forth in  Section  4(2)  thereof  and the  certificate  for each
security bears a restricted legend.

         In October 1996,  the Company issued 80,000 shares of common stock at a
price of $7.00  per  share to an  accredited  investor.  Also in  October  1996,
sharesof  common stock was issued to an accredited  investor at a price of $8.00
per share, shown as to be issued in 1996.

         In  November  1996,  the  Company   issued   convertible   subordinated
debentures  in the principal  amounts of $300,000,  $200,000 and $500,000 to Mr.
Douglas M. Kinney,  Mr.  Gordon L. Deane and the Douglas M. Kinney 1999 Retained
Annuity Trust,  respectively.  The convertible  subordinated  debentures  accrue
interest at prime plus two percent (2%) with interest and  principal  payable in
full on June 30,  1998.  All or a portion  of the  unpaid  principal  due on the
debenture is convertible  into Company common stock at $11 per share.  Through a
separate subscription agreement, the Company has granted piggy-back registration
rights to the investors for Company  common stock issued upon  conversion of the
convertible  subordinated  debentures.  The  Company has the right to prepay the
principal of the convertible subordinated debentures. The above-listed investors
have represented to the Company that they are "accredited  investors" as defined
under Rule 501 of the Securities Act of 1933, as amended.

         In December  1996, the Company  entered into a Debenture  Agreement and
Security  Agreement  with AJG  Financial  Services,  Inc.,  an affiliate of A.J.
Gallagher & Co.  ("Gallagher"),  whereby the Company  borrowed  $1,100,000,  and
could,  under certain  circumstances,  draw down an  additional  amount of up to
$2,900,000 (for a total borrowed amount of $4,000,000). In consideration for the
loan of  $1,100,000,  the Company  issued a convertible  subordinated  debenture
accruing  interest  at 6% per annum and  maturing  three  years from its date of
issuance (the "Subordinated Debenture"). On May 5, 1997, Gallagher converted the
Subordinated  Debenture and the Company issued 140,642 shares of common stock to
Gallagher  in exchange  for the entire  $1,100,000  Subordinated  Debenture  and
accrued interest based on a conversion price of $8.00 per share. The Company has
granted piggy-back and demand  registration  rights to Gallagher for the Company
common stock issued upon conversion of the Subordinated Debenture.

         On December  13, 1996,  the Company  granted  options to acquire  2,500
shares to each of Raymond J.  Weller and DeLance W.  Squire,  each a Director of
the Company,  as director  compensation.  The exercise price is $1.50 per share.
The Company also granted  20,000  options to an employee at an exercise price of
$1.50 per share.  Compensation  recognized or deferred from these  agreements to
total 256,250.

         In early fiscal year 1997,  the Company issued senior  debentures  (the
"Senior   Debentures")  to  Gallagher  in  the  aggregate  principal  amount  of
$2,900,000  pursuant to the  above-referenced  Debenture  Agreement and Security
Agreement.  The Senior Debentures accrue interest at prime plus two percent (2%)
and mature  three years from the date of  issuance.  The Senior  Debentures  are
collateralized by all real and personal  property  purchased by the Company with
the  proceeds  of the  Senior  Debentures.  The  proceeds  of  the  Subordinated
Debenture  and  the  Senior  Debentures  may  be  used  to  satisfy  contractual
obligations of the Company,  for working capital and to purchase equipment to be
used to construct  synthetic  fuel  facilities to be managed  and/or sold by the
Company or affiliates of the Company.

         On January 1, 1997, the Company granted 50,000 stock options, valued as
deferred  compensation of $562,500,  to Stanley M. Kimball,  an executive of the
Company,  at an  exercise  price of $1.50 per  share.  The  options  vest over a
two-year period starting January 1, 1997 and ending December 31, 1998.

         On January  2,  1997,  25,000  shares of common  stock were  issued for
$47,500,  which  consisted of 3,000 shares of common stock issued to an employee
of the Company in exercise of options at $1.50,  10,000  shares of common  stock
issued to an  accredited  investor  in  exercise  of options at $2.50 and 12,000
shares of common stock issued to an existing stockholder in exercise of warrants
at $1.50.

                                       23
<PAGE>

         On January 13, 1997,  the Company issued 100,000 shares of common stock
to a former  executive of the Company in exercise of options at $1.50 per share.
The  consideration was paid partly in cash and partly in offset of amounts owing
to the individual by the Company.

         On or about  January 27,  1997,  the  Company  agreed to and on June 6,
1997, the Company  issued 40,330 shares to certain  principals of RAS Securities
Corp.,  each  accredited  investors,  valued at $8.50 per share in settlement of
their claim totaling $342,765.

         On February  21, 1997 and March 6, 1997,  the Company  issued 1,905 and
2,929 shares of common  stock,  respectively,  to a  consultant  in exchange for
consulting services valued at a total amount of $40,500.

         On March 24, 1997,  the Company  issued  60,000 shares of common stock,
previously shown to be issued, to an accredited  investor in a private placement
in connection  with the purchase of property for the Alabama Plant.  The Company
was given a credit of $585,000  for the purchase of the property in exchange for
the 60,000 shares.

         As  described  in "ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources,"
on March 20, 1997, the Company  executed and delivered a promissory  note in the
aggregate  principal  amount of up to $5,000,000 to PacifiCorp in  consideration
for a loan of up to  $5,000,000.  The  loan is  convertible  into  approximately
714,286  shares  of  common  stock of the  Company  based on a $7.00  per  share
conversion  price.  In December  1997,  the amount of the note was  increased to
$7,000,000  and  PacifiCorp  was granted the right to convert the greater of (i)
$6,000,000  of the loan and loan  commitment  or (ii) the  actual  loan  balance
outstanding,  to  common  stock  at a price  of  $7.00  per  share,  subject  to
adjustment.

         As described in "ITEM 1. BUSINESS--Business of Company--Alabama Plant,"
on March 20, 1997,  the Company  executed  and  delivered a  conditional  option
agreement  to  PacifiCorp  relating  to the  repurchase  of  their  interest  in
Birmingham Syn Fuel, L.L.C. and the loan made by PacifiCorp.

         On March 26, 1997,  the Company  issued 20,913 shares of Company common
stock,  valued at $138,396,  recorded as a liability in 1996,  in  settlement of
litigation  with  S.C.  Marketing,  Inc.,  which  the  Company  believes  is  an
accredited investor.

         On April 1, 1997,  the  Company  granted  50,000  stock  options to Max
E.  Sorenson,  an  executive  of the  Company,  which was  recorded  as deferred
compensation  and valued at $312,500.  The exercise price is $1.50 per share for
50,000  options.  The Company also issued 20,000 stock options to an employee at
an exercise  price of $8.00 together with 10,000  additional  stock options that
were later forfeited.  In addition another employee received 5,000 stock options
with an exercised price of $1.50 per share valued at $31,250.

         On April 1, 1997,  the Company  granted  2,500 stock options, valued at
$15,625,  to Vern T. May, a Director of the Company,  as director  compensation.
The exercise price is $1.50 per share.

         On April 15,  1997,  the Company  granted  incentive  stock  options to
acquire 180,000 shares,  at an exercise price of $8.25 per share, to 9 employees
of the Company.

         On May 6, 1997, the Company  received funds and accepted  subscriptions
for the sale of 12,499 units (the  "Units"),  from three  accredited  investors.
Each Unit  consisted  of (i) four shares of Company  common  stock and (ii) four
warrants to acquire  Company  common stock at a price of $7.25 per share,  for a
total  purchase price per Unit of $24.00,  or a total of $299,976.  The warrants
are  exercisable at any time prior to the second  anniversary of their issuance.
The shares of Company common stock  issuable under the warrants have  piggy-back
registration  rights  during  the  two-year  period  following  the  date of the
subscriptions.

                                       24
<PAGE>

         On May 19,  1997,  the  Company  received  $90,000 in the  exercise  of
options to purchase  50,000  shares of common  stock at $1.80 per share,  by two
accredited investors.

         On July 3, 1997, the Company received funds and accepted  subscriptions
for the sale of 14,285 units (the  "Units") from an  accredited  investor.  Each
Unit consisted of (i) one share of Company common stock, and (ii) one warrant to
acquire  one share of Company  common  stock at a price of $8.00 per share for a
total purchase price per Unit of $7.00, or a total of $99,995.  The warrants are
exercisable at any time prior to the second anniversary of their issuance.

         On August 1, 1997, the Company  granted 100,000 stock options to Dee J.
Priano, an executive  officer of the Company,  at an exercise price of $8.25 per
share.

         On August  19,  1997,  the  Company  privately  sold  3,000  units (the
"Units")  to  an  accredited   investor  for  an  aggregate  purchase  price  of
$3,000,000.  Each Unit  consisted of (i) one share of the Company's  Series A 6%
Convertible  Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock"),  and (ii) a warrant to acquire 28.571 shares of Company common stock at
a price of $8.00 per share.  The  purchase  price for each Unit was $1,000.  The
warrants are  exercisable at any time on or before August 31, 1999. The Series A
Preferred  Stock  sold as part of a Unit was issued  pursuant  to the terms of a
Certificate  of  Designation  filed with the  Delaware  Secretary  of State (the
"Series A  Certificate  of  Designation").  Under the  Series A  Certificate  of
Designation, the Series A Preferred Stock (i) accrues dividends on a daily basis
at a rate of 6% per annum on the  liquidation  value ($1,000) of each share from
the date of issuance  until paid or converted  (with no compounding of dividends
being authorized),  payable semi-annually in the discretion of the Company, (ii)
is redeemable by the Company at any time after 30 days'  written  notice,  (iii)
has no voting rights  unless  specifically  authorized  by the Delaware  General
Corporate  Law, (iv) is  convertible at any time by the holder into common stock
at a conversion  price of $7.00 per share, and (v) is convertible by the Company
at any time after August 31, 1999 after 30 days' written  notice.  Further,  the
Series  A  Certificate  of  Designation   provides  for  certain   anti-dilution
protection  to the  holder  of the  Series  A  Preferred  Stock  if (i)  certain
dividends are distributed on the common stock,  (ii) a subdivision,  combination
or   reclassification  of  the  outstanding  common  stock  occurs  or  (iii)  a
reorganization event (such as a consolidation, merger, sale of substantially all
assets or a statutory  exchange) occurs.  Similar  anti-dilution  protection was
also  granted to the shares of common stock  issuable  under the  warrants.  The
Units were privately  placed pursuant to the terms of a Preferred Stock Purchase
Agreement, dated August 19, 1997 (the "Purchase Agreement"), between the Company
and the accredited  investor.  Under the Purchase Agreement,  the Company agreed
(i) to use its best  efforts  to  create a  vacancy  on the  Company's  Board of
Directors  for a term to expire on the date of the next  annual  meeting  of the
stockholders of the Company, (ii) to submit to the Board of Directors, for their
consideration, the appointment of a representative of the accredited investor to
fill the vacancy referred to in clause (i) above,  (iii) to demand  registration
rights for any person owning at least 50% of the common stock issued or issuable
upon  conversion  of the Series A Preferred  Stock and  exercise of the warrants
(such shares are referred to herein as "Converted  Shares") at any time prior to
August  31,  1998  subject  to the  rights of any other  holder of common  stock
previously   granted  demand   registration   rights,  and  (iv)  to  piggy-back
registration rights for the Converted Shares.

         On September  16, 1997,  the Company  issued  10,000  shares of Company
common  stock to a former  employee,  Mr. Dean Young,  in exercise of options at
$1.50 per share.  The  consideration  was paid in offset of amounts owing to the
individual  by the  Company.  Mr.  Young is a relative of Kenneth M. Young,  the
Company's former Chief Executive Officer and Chairman of the Board.

                                       25
<PAGE>

         On September  17, 1997,  the Company  issued  43,167  shares of Company
common stock, valued at $388,503, to United Group, Inc., and Robinson & Wisbaum,
Inc., both of which the Company believes are accredited investors, in settlement
of a contract dispute regarding consulting services.

         As of September 18, 1997, the Company privately sold 104,294 units (the
"Units")  to three  accredited  investors  for an  aggregate  purchase  price of
approximately  $2,200,000.  Each  Unit  consisted  of (i)  three  shares  of the
Company's  Series B Convertible  Preferred Stock, par value $.001 per share (the
"Series B Preferred Stock"),  and (ii) a warrant to acquire one share of Company
common stock,  at a price of $8.00 per share.  The purchase  price for each Unit
was $21.00.  The warrants are exercisable at any time on or before September 30,
1999. The Series B Preferred Stock sold as part of a Unit was issued pursuant to
the terms of a Certificate of Designation  filed with the Delaware  Secretary of
State  (the  "Series  B  Certificate  of  Designation").   Under  the  Series  B
Certificate of Designation,  the Series B Preferred Stock (i) accrues  dividends
on a daily basis at a rate equal to the 2-year  treasury  bond rate plus one and
one-half percent (initially 7.29% per annum but subject to a one-time adjustment
on March  18,  1998) on the  liquidation  value of each  share  from the date of
issuance  until  paid or  converted  (with no  compounding  of  dividends  being
authorized)  payable  semi-annually  in the  discretion of the Company,  (ii) is
redeemable  by the  Company  at any time  after 30 days'  written  notice at the
liquidation value plus accrued and unpaid dividends,  (iii) has no voting rights
unless  specifically  authorized by the Delaware General  Corporate Law, (iv) is
convertible by the Company at any time after  September 30, 1998 at a conversion
price  of  $7.00  per  share.  The  Units  were  privately  placed  pursuant  to
subscription  agreements  between the Company and the accredited  investors.  In
connection with the sale of the Series B Preferred Stock, the Company issued, as
a finders fee to two accredited  investors,  warrants to acquire an aggregate of
62,576 shares of the Company's common stock at a price of $8.00 per share at any
time prior to September 30, 1999.

         As of  September  30, 1997 and October 13, 1997,  the Company  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  $4,200,000.  Each Unit consisted of
five shares of common stock of the Company  together  with a warrant to purchase
one additional share of common stock. The exercise price of the warrant is $8.00
per share and the warrant must be  exercised by April 30, 1998.  Pursuant to the
terms of the  Memorandum,  the Company has  granted to  purchasers  of the Units
piggyback registration rights on the shares of common stock underlying the Units
and the  shares of common  stock  which  have or may  become  issuable  from the
exercise of the  warrants.  In  connection  with the sale of the Units under the
Memorandum, the Company has agreed to issue to three accredited investors finder
fees in the form of warrants to acquire an aggregate of up to 199,262  shares of
the  Company's  common stock at a purchase  price of $8.00 per share at any time
prior to October 31, 1999.  As of September  30,  1997,  350,00  shares had been
issued and 462,285 share are shown as to be issued.

         In September  1997, the Company granted options to acquire 2,500 shares
to James A. Herickhoff, a Director of the Company, as director compensation. The
exercise price is $9.00 per share.

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

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

                                       26
<PAGE>

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

         The Company  believes that the following  issuances of shares of common
stock and other securities were exempt from the registration requirements of the
Securities  Act of 1933,  as amended,  pursuant to the exemption set forth under
Regulation S thereof:

         On May 26, 1997 and July 7, 1997,  and in reliance on Regulation S, the
Company received funds and accepted  subscriptions for the sale of 224,000 units
and 60,000 units,  respectively (the "Units"), from accredited non-U.S.  persons
(the "Non-U.S. Persons"). Each Unit consisted of (i) one share of Company common
stock,  and (ii) a warrant to acquire  one share of  Company  common  stock at a
price of $7.25 per share,  for a total  purchase  price per Unit of $6.00,  or a
total of  $1,704,000.  The  warrants  are  exercisable  at any time prior to the
second  anniversary  of their  issuance.  The  shares of  Company  common  stock
issuable  under the  warrants and the Finder  Warrants  (as defined  below) have
piggy-back  registration rights and conditional demand registration  rights. The
conditional  demand  registration  rights are  triggered if within twelve months
from the date of subscription, the Securities and Exchange Commission imposes an
additional  holding period  requirement on securities issued under Regulation S,
other than the holding period  restrictions  currently in effect. Two Australian
entities acted as finders in the sale to the Non-U.S.  Persons.  As compensation
to the  finders,  the Company paid a cash fee of five percent of the proceeds of
such offerings to one finder and issued warrants (the "Finder  Warrants") to the
other  accredited  investor  finder to purchase  71,000 shares of Company common
stock at a price of $7.25 per share.  The Finder Warrants are exercisable at any
time  prior  to  the  second   anniversary   of  their   issuance.   Based  upon
representations made to the Company, the finder receiving warrant was a Non-U.S.
Person and the Finder Warrants were issued in reliance on Regulation S.

ITEM 6.           SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

         The  following  table  sets  forth the  Company's  selected  historical
consolidated  financial data as of and for the year ended December 31, 1993, the
nine months  ended  September  30, 1994 and the years ended  September  30, 1995
through 1997. The selected historical  consolidated financial data as of and for
the year ended December 31, 1993,  the nine months ended  September 30, 1994 and
as of  September  30, 1995 are derived  from audited  financial  statements  not
included elsewhere herein. The selected historical  consolidated  financial data
for the  year  ended  December  31,  1995,  and as of and for  the  years  ended
September  30, 1996 and 1997 were derived from the  financial  statements of the
Company which have been audited by Coopers & Lybrand,  L.L.P. included elsewhere
herein.  This  information  should be read in conjunction  with the consolidated
financial statements and notes thereto.

                                       27
<PAGE>
<TABLE>
<CAPTION>
                                             COVOL TECHNOLOGIES, INC.
                             (FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
                                                 AND SUBSIDIARIES

                                                         Nine
                                        Year Ended    Months Ended      Year Ended       Year Ended      Year Ended
                                       December 31,   September 30,    September 30,    September 30,   September 30,
                                   ----------------------------------------------------------------------------------
                                           1993           1994             1995             1996             1997
                                   ----------------------------------------------------------------------------------
Statement of Operations Data:
   Revenues:
<S>                                     <C>          <C>               <C>            <C>               <C>        
     License fees                       $     --     $      --         $  100,000     $  100,000        $        --
     Synthetic fuel sales, net            12,688        19,867             29,310        195,165             41,841
     Binder sales                             --            --                 --             --            208,836
                                   --------------------------------------------------------------------------------
     Total revenues                       12,688        19,867            129,310        295,165            250,677

   Operating costs and expenses:
     Cost of coal briquetting operations  22,977        32,386             37,165        859,574          4,803,248
     Research and development            393,300       387,128          1,265,072      1,044,192            663,935
     Selling, general and
        administrative                   426,512       393,109          1,494,270      3,796,569          2,997,812
     Compensation expense on                                                    
        stock options, stock warrants
        or issuance of common stock
                                              --            --            955,973     4,8796,569          2,058,126
     Write-off of purchased
        technology and trade secrets          --            --            344,900             --                 --
     Write-down of note receivable-related    --                                
        parties collateralized by common 
        stock and stock options               --            --          2,699,575         60,000
     Loss on sale of facility                 --            --                 --             --            581,456

                                   --------------------------------------------------------------------------------
     Total operating costs and
        expenses                         842,789       812,623          4,097,380     13,273,229        11,164,577
                                   -------------------------------------------------------------------------------
     Operating loss                    (830,101)     (792,756)         (3,968,070)   (12,978,064)      (10,913,900)

   Other income (expense):
     Interest income                          --            --              9,663        302,565           286,174
     Interest expense                   (30,870)      (21,158)           (113,137)       (94,706)       (1,645,195)
     Minority interest in net losses
        of consolidated subsidiaries          --            --                 --          4,456         1,245,226
                                   -------------------------------------------------------------------------------

     Other income (expenses)                  --         3,200             35,169       (166,066)           32,615
                                   -------------------------------------------------------------------------------

     Total other income (expense)       (30,870)      (17,958)            (68,305)        46,249           (81,180)
                                   -------------------------------------------------------------------------------
   Loss from continuing operations                                 
     before income tax                 (860,971)     (810,714)         (4,036,375)   (12,931,815)       10,995,080

   Income tax benefit (provision)             --       313,100           (488,000)       (23,000)               --
                                   -------------------------------------------------------------------------------
   Loss from continuing operations     (860,971)     (497,614)         (4,524,375)   (12,954,815)      (10,995,080)
</TABLE>
                                       28
<PAGE>
<TABLE>
<CAPTION>

                                                              Nine
                                             Year Ended    Months Ended      Year Ended       Year Ended      Year Ended
                                            December 31,   September 30,    September 30,    September 30,   September 30,
                                          ----------------------------------------------------------------------------------
                                                1993           1994             1995             1996             1997
                                          ----------------------------------------------------------------------------------
   Discontinued operations (Note 15):
<S>                                          <C>             <C>            <C>              <C>                <C>
   Loss from discontinued                                        
     operations                                 145,965        609,354       (1,129,176)        (881,505)           --
                                            --------------------------------------------------------------------------
   Cumulative effect of 
     change in accounting principle                  --         31,302               --               --            -- 
                                            ---------------------------------------------------------------------------
   Net income (loss)                          ($715,006)      $143,042      ($5,653,551)    ($13,836,320) ($10,995,080)
                                            --------------------------------------------------------------------------

   Net income (loss) per common share

   Loss per share from continuing
     operations                                  ($0.36)        ($0.13)          ($1.00)          ($1.86)       ($1.38)

   Income (loss) per share from
     discontinued operations                       0.06           0.16            (0.25)           (0.13)           --
                                            --------------------------------------------------------------------------

   Income (loss) per share before
     cumulative effect of change in
     accounting principle                         (0.30)          0.03            (1.25)          (1.99)        ($1.38)
        
                                            --------------------------------------------------------------------------
   Income per share of cumulative
     effect of change in accounting
     principle                                     0.00           0.01             0.00            0.00           0.00
                                            --------------------------------------------------------------------------

Net income (loss) per share                      ($0.30)         $0.04           ($1.25)         ($1.99)        ($1.38)
                                            --------------------------------------------------------------------------

Weighted average shares outstanding            2,417,568     3,789,996        4,524,056       6,941,424      8,080,102
                                            --------------------------------------------------------------------------
<CAPTION>

                                                          Nine
                                        Year Ended    Months Ended   Year Ended     Year Ended     Year Ended
                                       December 31,  September 30,  September 30,  September 30,  September 30,
                                       ------------------------------------------------------------------------
                                           1993          1994           1995           1996           1997
                                       ------------------------------------------------------------------------
Balance Sheet Data:
<S>                                    <C>            <C>            <C>          <C>            <C>         
   Working capital                     ($423,570)     ($619,907)     ($480,420)   ($3,482,227)   ($3,195,420)
   Net property and equipment            341,455        747,952      1,330,300      7,125,245     13,619,271
   Total assets                        2,129,885      4,852,637      2,659,977      8,772,072     26,360,814
   Long-term debt                        511,193        852,081        176,601        363,592      5,467,389
   Total stockholders' equity          1,107,915      2,989,529      1,182,768       (233,364)     5,928,277
</TABLE>

                                    29
<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
HISTORICAL  CONSOLIDATED  FINANCIAL DATA" and the financial statements and notes
thereto for the Company included elsewhere herein.

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

         The  information  set forth  below  compares  the  Company's  operating
results for fiscal year 1997 with its operating results for fiscal year 1996.

Continuing Operations

         Revenues.  For the fiscal year ended September 30, 1997, total revenues
decreased by $44,488 to $250,677  from  $295,165 for fiscal 1996.  There were no
license fees  recognized in fiscal 1997 as compared to $100,000  recognized  for
the year ended  September  30, 1996.  The Company  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 the Company serves as the
general  partner,  upon the sale of the Utah Plant.  The Company also received a
$250,000  payment  in  fiscal  1997  of a  one-time  advance  license  fee  from
Birmingham  Syn Fuel,  L.L.C.  ("BSF")  upon the issuance of a PLR to BSF by the
Internal  Revenue  Service.   The  Company  anticipates  that  it  will  receive
additional advance license fees from Coaltech and BSF in fiscal year 1998 in the
amounts of $1.1  Million  and  $250,000,  respectively.  Because  the Company is
obligated to render other services to Coaltech and BSF, the advance license fees
are  recorded as deferred  revenue and will be  recognized  into income over the
period over which such  other  services are  rendered.  The Company  anticipates
additional  license fees measured by a license fee rate  (adjusted  annually for
inflation) applied to the production and sale of qualified  synthetic fuels from
the Utah Plant,  the Alabama Plant and other plants that utilize the Briquetting
Technology.  Net proceeds from the sale of  briquettes  decreased in the current
period by $153,324 to $41,841 from $195,165 in briquette  sales for fiscal 1996.
Notwithstanding  the Utah Plant 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  at the Utah  Plant.  The
Company did produce  approximately  18,000 tons of synthetic  fuel during fiscal
1997;  however,  due to high levels of ash in the feedstock and hence in the end
product,  the synthetic fuel was not marketable.  The Company believes that upon
completion of a wash plant,  it will be able to supply  sufficient  quality coal
fines to the Utah Plant to allow the plant to operate at or near  capacity.  The
Company has had various  discussions  with potential  end-users of the synthetic
fuel product. However, there is currently no contract or obligation in place for
the  sale of the  synthetic  fuel  produced  at the  Utah  Plant.  See  "ITEM 1.
BUSINESS--Business  of Company--Utah  Plant." The Company received revenues from
binder sales in the amount of $208,836 in fiscal  1997.  No sales of binder were
made in fiscal 1996.

         Operating Costs and Expenses.  Operating  costs and expenses  decreased
$2,108,652  to  $11,164,577  for the fiscal year ended  September  30, 1997 from
$13,273,229  for the fiscal year ended  September 30, 1996.  Operating costs and
expenses  attributable to the  briquetting  operations  increased  $3,943,674 to
$4,803,248  for fiscal 1997 from $859,574 for the fiscal year 1996. On or before
December 31,  1996,  the Company  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,  the Company agreed to pay a penalty
of 6% of the expected  contract  price for the facilities if the Company did not
proceed with construction. As of the fiscal year ended September 30, 1997 and as
of the date of filing of this document,  there were several  contracts that will
not or may not be completed by June 30, 1998. Accordingly, the Company recorded

                                       30
<PAGE>

the liability for the penalty for these  facilities in fiscal 1997 in the amount
of $1,477,000. See ITEM 1. BUSINESS--Business of Company--Joint Ventures--Savage
and Other  Construction  Agreements--Construction  Penalties."  The Company also
incurred  costs of  $1,547,674  which  were  attributable  to the  start-up  and
operation of the Utah Plant for Coaltech, a partnership for which the Company is
the general partner. When US #1 and the Company sold the Utah Plant to Coaltech,
US #1 entered into an agreement to purchase  synthetic fuel produced at the Utah
Plant for costs  incurred plus $1 per ton. The Utah Plant  incurred  significant
costs  for  coal  fines,  labor,  binder  materials,  repairs  and  maintenance,
equipment  rental and other costs to work through  various  operational  issues.
These costs are included in the synthetic fuel purchase commitment and therefore
are included in the cost of coal briquetting operations.  Once the wash plant is
operational and is providing  quality coal fines to the Utah Plant,  the Company
anticipates  that the costs  incurred per ton of synthetic fuel produced will be
more in line  with the  marketable  value  of the  synthetic  fuel.  See ITEM 1.
BUSINESS--Business  of Company--Utah Plant." The remaining costs for briquetting
operations  in fiscal 1997 were more than fiscal 1996 costs 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 the
Company was in for fiscal year 1997 as compared to fiscal 1996.

         Research and development  costs decreased  $380,257 or 36.4% during the
year ended  September 30, 1997 from  $1,044,192 for the year ended September 30,
1996.  This decrease is due to the  Company's  focus of resources and efforts on
the commercialization of its synthetic fuel technology through: the construction
and  start-up  of its first  full  scale  briquetting  facilities,  the Utah and
Alabama Plants; the licensing of the Briquetting  Technology 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 fiscal
1997 costs were  principally  attributable to research and  development  efforts
related to the Company's synthetic fuels technology.

         Selling, general and administrative expense decreased $798,757 or 21.0%
to $2,997,812 for the year ended September 30, 1997 from $3,796,569 for the year
ended  September 30, 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 the  Company's  use of
personnel,  resources  and  efforts on the  commercialization  of the  Company's
synthetic fuel technology.

         Compensation  expense on stock options,  stock warrants and issuance of
common stock  decreased  $2,815,193 or 57.8% to  $2,058,126  for the fiscal year
ended September 30, 1997 from $4,873,319 for the fiscal year ended September 30,
1996. The decrease is  attributable  to reduction in the use of stock options in
compensating  employees and  consultants  of the Company.  The reduction is also
reflective of a general  change in the Company  philosophy  regarding the strike
price for options granted.  Generally, stock options that are or will be granted
by the Company will not be  "in-the-money",  thus serving as an incentive to the
recipient of the options to add value to the Company.

         In fiscal 1996,  the Company was  required,  under  generally  accepted
accounting  principles,  to write down the  discounted  $5 Million 6% promissory
note  (the  "Note")  from  the  sale  of  the  Construction   Companies  to  the
ascertainable  value of the property  collateralizing  the Note. This accounting
treatment  resulted in a write-down of $2,699,575 in fiscal 1996. The additional
write-down  in the  current  period of $60,000  resulted  from the change in the
value of the property  collateralizing  the Note.  The Note is guaranteed by the
Buyers of the  Construction  Companies and there has been no event of default or
past due payment  occur on the Note.  The Company has no reason to believe  that
the payments under the terms of the Note will not be made.

         In fiscal 1997, US #1 sold the Utah Plant to Coaltech for $3.5 Million,
evidenced by a promissory note payable in 44 quarterly installments of $130,000

                                       31
<PAGE>

starting  March 31, 1997.  The actual cost of US #1 to construct  the Utah Plant
was $4,081,456. Accordingly, a loss was incurred from the sale of the Utah Plant
in the amount of $581,456.

         Total Other Income and  Expenses.  In fiscal 1996,  the Company had net
other income of $46,249 and in fiscal 1997 had net other expenses of $81,180 for
a net  increase  in other  expenses  of  $127,429.  This  difference  is made up
principally  of interest  expense of  $1,645,200  of whick  $1,438,000  that was
booked as a result of the  transaction  the Company entered into with PacifiCorp
with  respect to the $5 Million  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  $1,240,770
($4,456 in fiscal 1996 compared to $1,245,326 in fiscal 1997).

         In late July 1996, the Company  negotiated  with PacifiCorp the general
terms of the sale of the Alabama Plant, including an arrangement for convertible
debt in the amount of up to $5 Million to fund working capital and  construction
costs needed to complete the Alabama Plant.  At the time of these  negotiations,
the Company agreed to a conversion  price of $7 per share,  the trading price of
the Company'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 the Company was approximately $9
per  share.  Notwithstanding  the fact  that at the time the  Company  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,  the  Company is  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 will not require an actual
cash payment nor will it impact the net equity of the Company.

         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).  

         The  minority  interest  in  the  loss  of  consolidated   subsidiaries
increased  $1,240,770 to $1,245,226 for fiscal 1997 from $4,456 for fiscal 1996.
The increase is attributable to the minority interest in the loss incurred by US
#1 in  fiscal  1997.  The  current  period  represents  the  first  full year of
operations  of US #1. US #1  incurred  losses in fiscal 1997 due to: the sale of
the Utah  Plant 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. See ITEM 1.
BUSINESS--Business of Company--Utah Plant."

         Loss from Continuing Operations. For the year ended September 30, 1997,
the Company had a net decrease of $1,959,735 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 writedown of notes receivable. These reductions were
partially  offset by: increases in costs for briquetting  operations,  including
losses  attributable to the Utah Plant and penalties for failure to proceed with
construction  contracts;  loss  from the sale of the Utah  Plant,  and  interest
expense booked on the PacifiCorp convertible debt.

                                       32
<PAGE>

Discontinued Operations

         For the fiscal year ended  September  30,  1996,  the Company  incurred
losses  from  discontinued  operations  in the  total  amount  of  $881,505.  No
additional  losses were  recorded  from  discontinued  operations in the current
period.

Year Ended September 30, 1996 Compared to Year Ended September 30, 1995

         The  information  set forth  below  compares  the  Company's  operating
results for fiscal year 1996 with its operating results for fiscal year 1995.

Continuing Operations

         Revenues.  Revenues from the sale of  briquettes  increased to $195,165
for the year ended September 30, 1996 from $29,310 recognized for the year ended
September  30,  1995.  A  substantial  portion  of the  sale  of  briquettes  is
attributable to production from the Geneva Plant. Fees from the licensing of the
Briquetting  Technology were $100,000 for the year ended September 30, 1996, and
for the year ended September 30, 1995.

         Operating  Costs  and  Expenses.   The  operating  costs  of  producing
briquettes  increased  to $859,574  for the year ended  September  30, 1996 from
$37,165 for the year ended September 30, 1995. The increase is reflective of the
phase of  development  and  operation the Company was in for fiscal year 1996 as
compared to fiscal 1995. In 1996, the Company incurred  substantial material and
labor costs in implementing  and improving the briquetting  product and process,
the costs for which were currently expensed rather than capitalized.

         Research  and  development  expenditures  decreased  $220,880  or 17.5%
during the year ended  September  30,  1996 from  $1,265,072  for the year ended
September  30,  1995.  During the year ended  September  30,  1996,  the Company
received a notice of allowance on one of the patent  applications which it filed
in 1993.  The Company also continued the  prosecution  of two  previously  filed
patent  applications  relating to the Briquetting  Technology during fiscal year
1996.

         Selling,  general and administrative  expenses increased  $2,302,299 or
154% for the year ended  September 30, 1996 from  $1,494,270  for the year ended
September  30,  1995.  During this period the Company was  increasing  staff and
other operating costs, in order to accommodate the licensing and  implementation
of the Briquetting  Technology,  including extensive activity in the development
of the Utah Plant and Alabama Plant.

         In fiscal year 1996, the Company recognized compensation expense on the
issuance  of stock  options  and  stock  warrants  at below  market  price,  and
compensation  expense on the  issuance of common stock for services in the total
amount of $4,873,319,  which represents an increase of $3,917,346 over the prior
year expense of $955,973. The Company issued stock options at below market price
to consultants  who provided and will continue to provide  services  relating to
the  exploitation  of  Company  technology,  identification  of  users  of  such
technology,  financing of the Company and its projects,  marketing,  and general
business  strategy.  The  options  generally  vest over ten years.  The  Company
expensed  the total value of certain of the options in fiscal 1996 in the amount
of $2,305,000.  The increase in this expense also reflects the  acceleration  of
the expense for options held by prior  management and other former  employees as
settlement in their termination in the amount of $832,500. As an enticement to a
key executive, the Company granted 100,000 options valued at $1,163,000. This

                                       33
<PAGE>

executive  signed an employment  contract with the Company through May 31, 1999.
The balance of the expense related  principally to the amortization of the value
of stock options, based on the vesting of such options.

         Also in fiscal year 1996, the Company recognized an expense in the form
of a write-down of the $5 Million 6% promissory note (the "Note")  received from
the Buyers of the  Construction  Companies  in the amount of  $2,699,575.  Under
generally accepted accounting principles,  the Company is required to write down
the  carrying  cost of the Note to the  ascertainable  value  of the  collateral
securing the Note.  There has been no event of default or past due payment occur
on the note. See "ITEM 1.  BUSINESS--Construction and Limestone Businesses." See
discussion below for discontinued operations.

         Loss From Continuing Operations. For the year ended September 30, 1996,
the Company had a loss from continuing  operations of $12,954,815 as compared to
$4,524,375  for the  year  ended  September  30,  1995.  The  increased  loss is
primarily  due to:  the  compensation  expense  from the  stock  options,  stock
warrants and issuance of common  stock;  writedown of Buyers' note from the sale
of  the  Construction  Companies;  and  the  expenses  related  to  the  initial
production of briquettes discussed above.

Discontinued Operations

         For the year ended September 30, 1996, the discontinued  operations had
a net loss of $590,480 as compared to a net loss of $351,782  for the year ended
September 30, 1995.  The Company also  recognized an additional  net loss on the
disposal of the discontinued operations in the amount of $291,025 in fiscal 1996
compared  to  $777,394  in  fiscal  1995.  The  Company  agreed  to pay  certain
liabilities  associated  with the  Construction  Companies as a condition of the
sale.  The  actual  amount  of  the  liabilities  was  greater  than  originally
estimated, resulting in an additional loss from discontinued operations in 1996.

Year Ended  September 30, 1995  Compared to the Nine Months Ended  September 30,
1994

         As a result of the change in the Company's fiscal year, the comparisons
of results of operations  for the year ended  September 30, 1995 reflect  twelve
months of activity as compared to nine months of activity  for the period  ended
September 30, 1994.

Continuing Operations

         Revenues.  Revenues  from "Clean Coal" sales  increased  $9,443 for the
year ended  September  30, 1995 from the $19,867  recognized  in the nine months
ended  September  30, 1994  primarily due to the closing out of the "Clean Coal"
inventory.  Licensing revenues of $100,000 for the year ended September 30, 1995
represent cash received from Greystone  Environmental  Technology,  Inc. for the
initial payment on the licensing of Company  technology and with respect to coke
and iron revert.

         Operating Cost and Expenses.  During the year ended September 30, 1995,
the Company  received a notice of allowance on the patent  application  which it
filed in 1993.  The  Company  also  filed  two  additional  patent  applications
relating  to the  Briquetting  Technology  during this time period and built and
tested a reduction furnace and installed an electric arc furnace in Price, Utah,
which was put into  production to demonstrate the feasibility of the Briquetting
Technology to produce iron from waste  materials.  During 1995, the Company also
developed two new binders,  which are more cost  effective  with better  thermal
stability  than the  binders  acquired  in 1991 and  1992.  As a result  of this
activity,  research and development  expenditures  increased $877,944 during the
year ended  September 30, 1995. As a result of these  developments,  the Company
wrote off the purchased technology and trade secrets in the amount of $344,900.

                                       34
<PAGE>

         Selling,  general and administrative  expenses increased  $1,101,161 in
1995 from  $393,109 for the nine months ended  September  30, 1994.  During this
period the Company was increasing  staff and other operating  costs, in order to
accommodate  the  licensing  and  exploitation  of the  Briquetting  Technology,
including starting up the Geneva plant.

         In 1995, the Company recognized compensation expense of $807,527 on the
issuance  of stock  options  and  stock  warrants  at below  market  price,  and
compensation  expense on the issuance of common stock for services in the amount
of $148,446.

         Loss From Continuing Operations. For the year ended September 30, 1995,
the Company had a loss from  continuing  operations of $4,524,375 as compared to
$497,614 for the nine months ended  September 30, 1994.  The  increased  loss is
primarily due to increased  operating costs and expenses discussed above and the
recognition of tax expense of $488,000 in 1995 compared to a benefit of $313,100
in 1994. The expense in 1995 is due to the Company's inability to offset its net
loss against  discontinued  operations taxable income, while the benefit in 1994
is due to the  Company's  ability  to  offset  its net  operating  loss  against
discontinued operations income.

Discontinued Operations

         For the year ended September 30, 1995, the discontinued  operations had
a net loss of  $351,782  as  compared  to net income of  $609,354  in 1994.  The
Company  also  recognized  a net  loss  on  the  disposal  of  the  discontinued
operations  in the  amount of  $777,394  in 1995,  which  includes  a reserve of
$330,000  for  operating  losses  during the  disposal  period,  offset by a tax
benefit  of  $562,000.  The  loss in 1995 is due to the  increased  focus on the
Briquetting  Technology and the Company's efforts to scale down the Construction
Companies' activities until a buyer could be found.

Liquidity and Capital Resources

         Liquidity

         For the fiscal year ended September 30, 1997,  management  believes the
Company made significant  progress in its movement from a development company to
an  operating  company.  The  increase in cash used by the Company in  operating
activities from $2,574,513 in fiscal year 1996 to $4,202,077  during fiscal year
1997  was   largely   due  to   expenditures   made  by  the   Company   in  the
commercialization of its Briquetting Technology,  including the sale of the Utah
Plant to Coaltech,  assistance to licensees of the  Company's  technology in the
development   of  projects  that  will  utilize  the   Briquetting   Technology,
development of projects that the Company  intends to construct and sell to other
entities,  and  improvement  of the binder  and  process  technology  related to
production  of  synthetic  fuel.  The  Company  was  able  to fund  this  growth
principally through the issuance of common stock,  preferred stock, warrants and
convertible debt.

         Capital Resources

         During  fiscal year 1997,  the  Company met its cash flow  requirements
principally  through  issuance of debt and convertible  debt, the sale of equity
and from advance  license fees  received.  As of September 30, 1997, the Company
had a working  capital  deficit of  $3,195,420,  compared  to a working  capital
deficit of  $3,482,227  at September  30, 1996.  The Company  believes  that its
current cash on hand,  additional  advanced license fee to be received,  and, if

                                       35
<PAGE>

nesseccary  available financing will be sufficient to fund the operations of the
Company until cash flows from  operations  are  sufficient to fund the Company's
operations.  However,  there is no  assurance  that the Company  will be able to
obtain the  necessary  financing  or receive cash flows from  operations  during
fiscal year 1998.

         The Company  anticipates that cash flow from: (i) licensing and royalty
fees from plants utilizing the Briquetting  Technology;  (ii) cash distributions
from US #1 and AS #1; (iii) the sale of chemical binder to plants  utilizing the
Briquetting  Technology;  (iv)  operating  fees for the  operation of facilities
owned by third  parties;  (v) payments on notes  receivable and (vi) proceeds of
equity and debt offerings will be available and used to fund working capital and
other operating needs.

         In the second and third  quarters of the fiscal  year ending  September
30, 1998, the Company anticipates payments of advance license fees for each site
utilizing the  Company's  Briquetting  Technology,  except for the Savage Mojave
project.  The  timing  for and  amount  of such fees  varies  and is tied to the
commencement of construction,  the completion of construction,  the receipt of a
PLR for a  particular  project,  or receipt of project  financing.  Since  these
conditions  should be met no later than June 30, 1998, all such advance  license
fees, if any, should be received by the end of the third fiscal quarter of 1998.

         The Company  anticipates  license fees from the  production and sale of
synthetic fuel from the Utah Plant,  Alabama Plant and Savage Mojave project, if
any,  after  the  second  quarter  of  fiscal  year  1998.  The  balance  of the
briquetting  facilities licensing the Briquetting  Technology are expected to be
placed into service late in the second quarter and in the third quarter of 1998.
Accordingly,  the Company  expects  that there will be earned  license fees paid
from  production  and sales from these plants  after the third  quarter of 1998,
with more significant fees paid after the end of fiscal year 1998.

         Advance license fees and ongoing license fees  attributable to the Utah
Plant and the Alabama  Plant are payable to US #1 and AS #1,  respectively.  The
Company  will  receive  its  share  of such  license  fees,  net of  partnership
expenses,  in the form of cash  distributions  in  proportion  to the  Company's
interests in the partnerships, 60% for US #1 and 80% for AS #1.

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

         Under  current  contracts,  the only facility for which the Company has
operational responsibility is the Utah Plant. The Company will earn a prescribed
amount per ton for production at the Utah Plant.  The Company expects that there
will be other plants for which the Company will have operational  responsibility
and for which it will earn an operation  and  maintenance  fee. The Company does
not expect  that  operation  and  maintenance  fees will  constitute  a material
portion of its income.

         During  fiscal  year  1998,  the  Company  anticipates   receiving  its
proportionate  share  (60%  for US #1 and  80%  for AS #1) of  payments  made by
Coaltech and BSF for the purchase of the Utah and Alabama Plants, respectively.

                                       36
<PAGE>

         The  Company  intends  to  seek  project  specific  financing  for  the
financing of construction of certain  synthetic coal facilities.  That financing
may be in the form of traditional debt financing, convertible debt, debt with an
interest  in the cash flow  attributable  to the  facility  being  financed,  or
financing by a potential  purchaser of the  facility.  The Company and AS #1 are
financing the  construction  of the Alabama  Plant  through a  convertible  debt
arrangement  with  PacifiCorp  (see details of arrangement  under "Existing Debt
Arrangements"  below).  The Company has made  initial  payments for one facility
through  construction  financing  provided by the  wholly-owned  subsidiary of a
major utility (see details of arrangement  under  "Existing  Debt  Arrangements"
below).  The  Company has  entered  into a  conditional  letter  agreement  with
Gallagher, whereby financing for up to four facilities,  subject to its approval
of the  facility  and other  conditions  would be provided  in  exchange  for an
interest in the royalties  receivable  from the  facilities  and other fees. The
agreement is subject to several  conditions  and there is no assurance  that the
financing will be provided. If financing for four facilities were provided,  the
Company  estimates such financing to be in an aggregate  amount of approximately
$25 Million.  Facilities  being built by licensees of the  Company's  technology
will  generally be financed by such  Licensees.  There is no assurance  that the
Company or its  licensees  will be able to obtain  the  necessary  financing  to
construct the synthetic fuel facilities.

         Existing Debt Arrangements

         In May 1995, the Company  secured  financing in the form of an $825,000
master  equipment  lease  funded  by a  commercial  bank to  equip  its  initial
briquetting plant at Geneva's facilities.  The Company has remaining obligations
for lease payments  totalling  $465,000  through February 2000 at which time the
Company has the option to purchase the equipment from the bank for approximately
$124,000.

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

         In  December  1996,  the  Company  entered  into  several  construction
agreements.  In each  agreement,  the Company  agreed to penalty  clauses in the
aggregate  amount of  $3,012,000  if they  failed to build the  facilities.  The
Company booked a liability in the current period in the amount of $1,477,000 for
facilities that will not or may not be built. See "ITEM 1. BUSINESS--Business of
Company-- Joint Ventures--Savage and Other Construction Agreements--Construction
Penalties."

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

         In December  1996, the Company  entered into a Debenture  Agreement and
Security Agreement with AJG Financial Services,  Inc., an affiliate of Gallagher
("Gallagher"),   whereby  the  Company  borrowed   $1,100,000,   pursuant  to  a
Convertible  Subordinated  Debenture  accruing  interest  at 6%  per  annum  and
maturing  three years from its date of issuance (the  "Subordinated  Debenture")
and $2,900,000 pursuant to Senior Debentures accruing interest at prime plus two
percent  (2%) and  maturing  three years from the date of issuance  (the "Senior
Debenture"). The Subordinated Debenture (including accrued interest) was

                                       37
<PAGE>

converted to 140,642  shares of the Company's  common stock on May 5, 1997.  The
Company has granted piggy-back and demand  registration  rights to Gallagher for
the Company common stock issued on conversion of the Subordinated Debenture. The
Senior Debentures are collateralized by all real and personal property purchased
by the Company  with the proceeds of the Senior  Debenture.  The proceeds of the
Subordinated Debenture and the Senior Debenture were used to satisfy contractual
obligations of the Company,  for working capital and to purchase  equipment used
to  construct  coal  briquetting  facilities  to be managed  and/or  sold by the
Company or affiliates of the Company.

         The Company is  constructing  a wash plant to provide washed coal fines
to the Utah Plant for the  manufacture of synthetic  fuel. The  construction  is
being financed through Gallagher. The total estimated cost for the wash plant is
approximately  $4 Million.  As of September  30, 1997,  the Company had borrowed
$945,104. The financing is evidenced by a promissory note executed and delivered
by the Company to Gallagher and is secured by the wash plant. The note currently
bears  interest at 6% per annum with  principal and interest due and payable two
years  from  the time the debt was  incurred.  As  additional  consideration  to
Gallagher for financing the wash plant, the Company agreed, subsquent to fiascal
1997, to grant Gallagher  warrants to purchase  approximately  400,000 shares of
the  Company  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 are  immediately  exercisable  and expire in two
years.

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

         On March 20,  1997,  the Company  entered into a  Convertible  Loan and
Security Agreement (the "Loan Agreement") with PacifiCorp. On December 12, 1997,
the Company and PacifiCorp  amended the Loan  Agreement.  Under the amended Loan
Agreement  terms, the Company may borrow up to $7,000,000 as evidenced by a draw
down  promissory  note (the  "Promissory  Note")  payable to  PacifiCorp.  As of
September 30, 1997, the Company had drawn  $3,302,422  under the Loan Agreement.
Principal  and accrued  interest on the  Promissory  Note are due and payable on
August 31, 1998 (the "Due Date"),  unless the Promissory  Note is converted into
Company common stock. Interest due on the Promissory Note is calculated based on
a 360 day year and the  actual  number of days  lapsed,  and will be  compounded
monthly.  The  interest  rate is a rate per annum equal to the lesser of (i) the
highest  rate  allowed by law, or (ii) the sum of the rate of interest  publicly
announced  by Morgan  Guaranty  Trust  Company of New York in New York City from
time to time plus two  percent  (2%) per annum.  The  proceeds  of the loan (the
"Loan") may be used by the Company to: (i) complete  construction of the Alabama
Plant; (ii) finance the purchase of coal fines for the Alabama Plant; (iii) fund
the net working capital needs of the Alabama Plant; (iv) finance the development
and  construction of a wash plant for coal fines;  and (v) other uses related to
the Alabama Plant approved by PacifiCorp in its sole  discretion.  The Company's
obligation  to repay the Loan is  secured  by a  security  interest  and lien on
certain property relating to the Alabama Plant. In addition,  PacifiCorp has the
right to convert the greater of $6,000,000 or the actual amount  borrowed by the
Company up to $7 Million at a  conversion  price of $7.00 per share,  subject to
certain  adjustments  as  provided  in the  Loan  Agreement.  On  May  5,  1997,
PacifiCorp  filed a Schedule 13D with the  Securities  and  Exchange  Commission
reporting  its  beneficial  ownership  as being in excess of 5% of the shares of
Company  common  stock  should  PacifiCorp  convert the full amount of the Loan.
Pursuant  to the  Registration  Rights  Agreement,  dated as of March 20,  1997,
between the Company and PacifiCorp, PacifiCorp has been granted certain demand

                                       38
<PAGE>

and  piggy-back  registration  rights with  respect to shares of Company  common
stock that could be acquired by PacifiCorp pursuant to the Loan Agreement.

         Subsequent  to the fiscal year ended  September  30, 1997,  the Company
entered into an interim  construction  financing agreement with the wholly-owned
subsidiary  of a major  utility to finance  up to $1 Million  for the  Company's
purchase of equipment and payment of other project development costs relating to
certain facilities. As of the filing of this report,  approximately $560,000 has
been advanced under this financing agreement.  The Company's obligation to repay
the amounts borrowed is secured by the collateral purchased with the proceeds of
the financing. Interest accrues on the amount advanced at a per annum rate equal
to the LIBOR rate plus 1%  payable  monthly  commencing  December  1, 1997.  The
principal  amount of the  financing  is payable  upon the  closing of a take-out
construction  loan or December 31, 1998,  whichever  occurs  first.  See ITEM 1.
BUSINESS--Business of Company--Other Construction Agreements--Major Utility."

Forward Looking Statements

         Statements in this Item 7 regarding the  Company's  expectations  as to
the  financing,   development  and  construction  of  facilities  utilizing  its
Briquetting Technology, 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 the Company
believes that its  expectations are based on reasonable  assumptions  within the
bounds  of its  knowledge  of  its  business  and  operations,  there  can be no
assurance that actual results will not differ  materially from its expectations.
In addition to matters affecting the Company's  industry or the coal industry or
the economy  generally,  factors which could cause actual results to differ from
expectations  set  forth  in the  above-identified  forward  looking  statements
include,  but is not  limited to, the  following:  (i) timely  construction  and
completion of facilities,  and in particular, the coal briquetting facilities by
the placed-in-service  date; (ii) ability to obtain needed additional capital on
terms  acceptable to the Company;  (iii) changes in  governmental  regulation or
failure to comply  with  existing  regulation  which may  result in  operational
shutdowns  of its  facilities;  or (iv) the  availability  of tax credits  under
Section 29 of the Code. See "ITEM 1. BUSINESS--Forward Looking Statements" for a
description  of additional  factors  which could cause actual  results to differ
from expectations.

Impact of Recently Issued Accounting Standards

         In March of 1997, the Financial  Accounting Standards Board issued SFAS
No. 128,  "Earnings  Per Share".  This  statement  simplifies  the standards for
computing  earnings per share  previously  found in APB Opinion No. 15, Earnings
Per Share, and makes them comparable to international EPS standards. It replaces
the  presentation  of primary  EPS with a  presentation  of basic  EPS.  It also
requires  dual  presentation  of basic and diluted EPS on the face of the income
statement  for all  entities  with  complex  capital  structures  and requires a
reconciliation  of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.  This statement is
effective for financial  statements  for fiscal years ending after  December 15,
1997. The Company has not determined the possible effect of this standard on its
financial statements.

         In June of 1997, the Financial  Accounting  Standards Board issued SFAS
No.  130  "Comprehensive  Income."  This  Statement  establishes  standards  for
reporting  and display of  comprehensive  income and its  components  (revenues,
expenses,  gains,  and  losses)  in a  full  set  of  general-purpose  financial
statements.  This  Statement  requires  that all items that are  required  to be
recognized under accounting  standards as components of comprehensive  income be
reported in a financial statement that is displayed with the same prominence as

                                       39
<PAGE>

other  financial  statements.  This Statement does not require a specific format
for that financial  statement but requires that an enterprise  display an amount
representing  total  comprehensive  income  for the  period  in  that  financial
statement. This statement is effective for financial statements for fiscal years
ending  after  December 15, 1997.  The Company has not  determined  the possible
effect of this standard on its financial statements.

Impact of Inflation

         During  fiscal  year  1997,  cost  increases  to the  Company  were not
materially impacted by inflation.


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
and financial statement disclosure.

                                       40
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors and executive  officers of the Company as of December 15,
1997 are as follows:


Name                        Age                 Position
-------------------       -------     -----------------------------------------



Brent M. Cook                37       President, Chief Executive Officer
                                      and Director

Stanley M. Kimball           43       Chief Financial Officer, Treasurer
                                      and Director

Alan D. Ayers                40       Vice President of Administration

George W. Ford, Jr.          52       Vice President of Research and Development

Steven R. Brown              39       Vice President of Engineering and
                                      Construction

Russell G. Madsen            47       Vice President

Max E. Sorenson              48       Vice President

Dee J. Priano                52       Vice President

Asael T. Sorensen, Jr.       43       Secretary and General Counsel

Raymond J. Weller            51       Chairman of the Board of Directors

DeLance W. Squire            78       Director

Vern T. May                  57       Director

James A. Herickhoff          55       Director

John P. Hill, Jr.            37       Director


Brent M. Cook has served as President and Chief  Executive  Officer and Director
since October 1996, and served as Chief  Financial  Officer from June 1996 until
December 1996. Mr. Cook is a Certified Public  Accountant.  Prior to joining the
Company,  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.
PacifiCorp  is not  affiliated  with  the  Company  except  for the  transaction
described in "ITEM 1. BUSINESS--Business of Company".

Stanley M.  Kimball has served as Chief  Financial  Officer and  Director  since
January 1, 1997 and as Treasurer  since May 1997.  Prior to joining the Company,
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

                                       41
<PAGE>

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.

Alan D. Ayers has served as Vice President of Administration  since October 1997
and served as Chief  Operating  Officer from June 1996 through October 1997. Mr.
Ayers joined the Company in August of 1995 as Manager of the Company's  investor
relations  department.  From June 1996 to February  1997,  Mr. Ayers served as a
Director of the Company.  From 1993 to 1995,  Mr. Ayers was the General  Manager
for Taylor Maid Beauty  Supply and was  responsible  for the  operations  of the
regional supply company. From 1987 to 1993, Mr. Ayers was Director of Operations
for  Knighton   Optical,   Inc.  Mr.  Ayers  received  his  Master  of  Business
Administration from the University of Utah.

George W. Ford, Jr. has served as Vice President of Research and  Development of
the Company  since  August  1993.  From August 1993 to February  1997,  Mr. Ford
served as a Director of the Company. 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 has served as Vice President of Engineering and  Construction of
the Company since  February  1995. Mr. Brown served as a Director of the Company
from September 1995 to March 1997. Mr. Brown was  responsible for the management
of  the  construction  companies  and  the  limestone  quarry.  He is  currently
responsible  for  the  design  and  construction  of  the  Company's  production
facilities.  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.  Mr.  Brown  obtained  a  B.S.  degree  in  Civil
Engineering  and  a  Master  of  Business   Administration  from  Brigham  Young
University.

Russell G. Madsen has served as Vice President of the Company since October 1996
and served as Vice  President of  Operations  from August 1992  through  October
1996.  Mr.  Madsen served as a Director of the Company  between  August 1992 and
January  1997,  and was  Interim  Chairman  of the  Board of  Directors  between
November 1996 and January  1997.  Mr.  Madsen is  responsible  for the Company's
prototype  briquetting plant in Price,  Utah.  Between 1981 and 1992, Mr. Madsen
was employed as an accounting  manager over the Western Coal Division of Coastal
States  Energy,  a subsidiary  of Coastal  Corporation.  From 1984 to 1991,  Mr.
Madsen also was a Vice  President and Director of Specialized  Mining  Services,
Inc., a mine support service company from whom the Company acquired  briquetting
technology.  Mr. Madsen  graduated from Utah State University with a B.S. degree
in Agricultural Economics and a minor in Business Management.

Max E.  Sorenson has served as Vice  President of the Company  since April 1997.
Prior to Mr.  Sorenson's  employment  with the Company,  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  operation  and  technology


                                       42
<PAGE>

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.

Dee J. "DJ"  Priano has served as Vice  President  of the Company  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 the Company as its General  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.  Since 1987, Mr. Sorensen has
been a consultant with the American Management  Association,  a business seminar
and consulting non-profit  organization  headquartered in New York. 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.

Raymond J. Weller has served as a Director  of the  Company  since July 1991 and
since January 1997 has served as Chairman of the Board of Directors. Since 1991,
Mr.  Weller  has been Vice  President  of HMO  Benefits  of Utah,  a  Utah-based
insurance  brokerage  firm.  From 1985 to 1991, Mr. Weller was an agent with the
insurance brokerage of Galbraith, Benson and McKay.

DeLance W. Squire has served as a Director of the Company since  December  1996.
Mr.  Squire was the founder of Squire & Co.,  Orem,  Utah,  a public  accounting
firm,  and  retired in 1986.  Since  1986,  Mr.  Squire  has been the  Executive
Director for the Commission for Economic  Development,  Orem, Utah. In addition,
Mr.  Squire is a member of the Impact  Fees  Committee  and the  Strategic  Plan
Committee to the City of Orem,  Utah. He also serves as a member of the board of
trustees for Mountain View Hospital, Payson, Utah. Mr. Squire served as Mayor of
Orem from 1982 to 1985. Mr. Squire  received his B.S.  degree in Accounting from
Brigham  Young  University in 1947 and became a Certified  Public  Accountant in
1950.

Vern T. May has served as a Director of the Company since February 1997. Mr. May
was  employed  by Dow  Chemical  in  various  capacities  from  1964  until  his
retirement  in 1995,  including  Technical  Director  of Organic  Chemicals  and
Ag/Pharma Process  Research,  Manager of Agricultural  Chemicals  Production and
Environmental Services, Director of Applied Science and Technology Laboratories,
and  Director  of  Health  and  Environmental  Sciences.  At  the  time  of  his
retirement,  Mr. May was chairman of the advisory board for the Center for Waste
Reduction  Technologies,  a  member  of the  advisory  board  for  the  Advanced
Combustion  Engineering Research Center at BYU, and a member of the board of the
California  Engineering  Foundation.  Mr.  May holds a BES  degree  in  Chemical
Engineering from Brigham Young University.

James A.  Herickhoff has served as a Director since August 1997. Mr.  Herickhoff
is and has been a  corporate  consultant  since  1994,  and from 1987 to 1994 he
served as President of Atlantic Richfield  Company's Thunder Basin Coal Company.
Mr. Herickhoff has over 25 years of experience in the coal and mining industries
and  extensive  experience  in  strategic  positioning  of these  companies  for
long-term growth and competitiveness. Mr. Herickhoff led the growth of the Black
Thunder  and Coal Creek coal mines from 19 million to  approximately  40 million
tons per year of production.  Mr.  Herickhoff  previously served as President of
Mountain  Coal  Company,  managing  all of the  ARCO's  underground  mining  and

                                       43
<PAGE>

preparation  plants.  Mr. Herickhoff is the past President of the Wyoming Mining
Association  and  a  former  Board  member  of  the  Colorado  and  Utah  Mining
Associations.  Mr.  Herickhoff  received  his  Bachelor  degree in 1964 from St.
John's  University,  a Master of  Science  degree in 1966 from St.  Cloud  State
University  and  attended  the  Kellogg   Executive   Management   Institute  at
Northwestern University in 1986.

John P. Hill, Jr. has served as a Director since September 1997. Mr. Hill is the
president of Quince Associates,  a closely held investment company.  Since 1989,
Mr. Hill has also served as President of Trans Pacific Stores, Ltd., a privately
held operator of retail stores.  Prior to 1989, Mr. Hill was the Chief Financial
Officer for various  privately  held retail and restaurant  companies.  Mr. Hill
received a Bachelor  of Science  degree in  Accounting  from the  University  of
Maryland and became a Certified Public Accountant in 1984.

         The Company's  Executive  Officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company's Directors hold
office until the expiration of their respective terms and until their successors
have been duly elected and qualified. Officers serve at the will of the Board of
Directors.

         At the  1997  Annual  Meeting  of  Stockholders,  an  amendment  to the
Company's  Bylaws was adopted to: (a) classify the Board of Directors into three
classes,  as nearly equal in size as  possible,  serving  staggered  three-year,
terms; (b) set a minimum of five and maximum of nine directors on the Board; (c)
provide that a director  may be removed from office at any time by the vote;  or
written  consent of  stockholders  representing  not less than two-thirds of the
issued and outstanding  stock entitled to vote and (d) provides that an increase
in the  maximum  size of the  board  requires  the vote or  written  consent  of
stockholders representing not less than two-thirds of the issued and outstanding
stock entitled to vote. Based on that amendment to the Bylaws, the Directors are
classified as follows:

================================================================================
CLASS I(1)               CLASS II(2)              CLASS III(3)
--------------------------------------------------------------------------------
Vern T. May              Raymond J. Weller        Brent M. Cook
--------------------------------------------------------------------------------
John P. Hill, Jr.        --                       --
--------------------------------------------------------------------------------
James A. Herickhoff      DeLance W. Squire        Stanley M. Kimball
================================================================================
--------------
(1)      Term expires at the annual meeting of stockholders in 1998.
(2)      Term expires at the annual meeting of stockholders in 1999.
(3)      Term expires at the annual meeting of stockholders in 2000.

The salaried  employees of the Company  serving as Directors are not compensated
as  Directors.  The Board of Directors has granted stock options to Directors of
the Company not otherwise employed by the Company. Such Directors also receive a
fee for each meeting attended and reimbursement of out-of-pocket expenses.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's officers and directors, and persons who own more than ten percent of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
ownership and changes in ownership with the  Securities and Exchange  Commission
and the National  Association of Securities Dealers.  Officers,  directors,  and
greater than  ten-percent  stockholders  are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)

                                       44
<PAGE>

forms they file.  Based solely on a review of the copies of such forms furnished
to the Company  between  October 1, 1996,  and  September  30, 1997, on year-end
reports   furnished  to  the  Company   after   September   30,  1997,   and  on
representations that no other reports were required,  the Company has determined
that during the 1997 fiscal year all applicable 16(a) filing  requirements  were
met except as follows:

         Russell G. Madsen, a Vice President of the Company,  acquired an option
to purchase 25,000 shares of common stock of the Company on August 13, 1996. Mr.
Madsen filed a Form 4 reporting the  transaction on September 18, 1996. The Form
4 should have been filed on or before  September  10,  1996.  Additionally,  Mr.
Madsen disposed of 40,000 shares in January 1997 and disposed of 1,340 shares in
February 1997. Mr. Madsen filed Forms 4 to report the  transactions  on December
29, 1997. The Forms 4 should have been filed on or before  February 10 and March
10,  1997,  respectively.  

         George W. Ford,  Jr., Vice President of Research and Development of the
Company,  acquired an option to purchase  25,000  shares of common  stock of the
Company on August 13, 1996. Mr. Ford filed a Form 4 reporting the transaction on
September 18, 1996. The Form 4 should have been filed on or before September 10,
1996. Mr. Ford disposed of 18,000 shares and acquired 100,000 shares through the
exercise  of  options  in  November  1996  and  filed  a Form 4  reporting  such
transaction on December 18, 1996. The Form 4 should have been filed on or before
December 10, 1996.  Additionally,  Mr. Ford disposed of 3,000 shares in March of
1997, disposed of 7,000 shares in April of 1997, disposed of 9,000 shares in May
of 1997,  disposed of 1,000 shares in June of 1997,  disposed of 3,000 shares in
July of 1997,  and disposed of 10,000 shares in October of 1997.  Mr. Ford filed
Forms 4 to report the  transactions  on December 29,  1997.  The Form 4's should
have been filed on or before April 10, May 10, June 10, July 10,  August 10, and
November  10, 1997,  respectively.  

         Michael Q.  Midgley,  a former  officer and  Director  of the  Company,
acquired  options to purchase  300,000  shares of common stock of the Company on
August  13,  1996.  Mr.  Midgley  filed a Form 4 to report  the  transaction  on
September 18, 1996. The Form 4 should have been filed on or before September 10,
1996.

         Kenneth  M.  Young,  a former  officer  and  Director  of the  Company,
acquired  options to purchase  70,000  shares of common  stock of the Company on
August 13, 1996. Mr. Young filed a Form 4 to report the transaction on September
18, 1996. The Form 4 should have been filed on or before September 10, 1996.

         Max E. Sorenson was appointed Vice  President of the Company  effective
April  1,  1997,  and  thereby   became  subject  to  Section  16(a)   reporting
requirements.  Mr. Sorenson also acquired  options to purchase 100,000 shares of
common  stock of the  Company.  Mr.  Sorenson  did not file a timely Form 3. Mr.
Sorenson filed a Form 5 reporting  both the holdings  required to be reported on
Form 3 and the  acquisition  of the options on  November  25,  1997.  The Form 5
should have been filed on or before November 14, 1997.

         Asael T. Sorensen,  Jr.,  Secretary and General Counsel of the Company,
acquired  1,000  shares of common  stock of the Company on April 24,  1997.  The
acquisition should have been reported on a Form 4 for April 1997 and filed on or
before May 10, 1997. Mr.  Sorensen  filed a Form 5 reporting the  transaction on
December 29, 1997.  The Form 5 should have been filed on or before  November 14,
1997. Additionally,  Mr. Sorensen acquired options to purchase 100,000 shares of
common stock of the Company on August 13, 1996.  Mr.  Sorensen filed a Form 4 to
report the  transaction on September 18, 1996. The Form 4 should have been filed
on or before September 10, 1996.

         DeLance W. Squire, a Director of the Company,  was appointed a Director
of the Company and  received  options to acquire  2,500  shares on December  13,
1996. He filed a Form 3 reporting  the holdings on January 21, 1997.  The Form 3
holdings  should have been reported on a Form 3 filed on or before  December 23,
1996.

                                       45
<PAGE>

         Dee J.  Priano,  a Vice  President  of the  Company,  filed a Form 5 to
report Form 3 holdings as a result of being  appointed an officer of the Company
and the  acquisition of options to acquire 100,000 shares on August 1, 1997. The
Form 5 was filed on December 29,  1997.  The Form 5 should have been filed on or
before  November 14, 1997.  The Form 3 holdings  should have been  reported on a
Form 3 filed on or before August 10, 1997.

         Vern T. May, a Director of the Company, filed a Form 5 to report Form 3
holdings  as a result of being  appointed  a  Director  of the  Company  and the
acquisition  of options to acquire 2,500 shares.  The Form 5 was sent for filing
on or about  January  13,  1998.  The Form 5 should have been filed on or before
November 14,  1997.  The Form 3 holdings  should have been  reported on a Form 3
filed on or before February 20, 1997.

         James A.  Herickhoff,  a  Director  of the  Company,  filed a Form 5 to
report Form 3 holdings as a result of being  appointed a Director of the Company
and the acquisition of options to acquire 2,500 shares.  The Form 5 was sent for
filing on or about  January  13,  1998.  The Form 5 should have been filed on or
before  November 14, 1997.  The Form 3 holdings  should have been  reported on a
Form 3 filed on or before August 25, 1997.

         John P. Hill, Jr., a Director of the Company,  filed a Form 5 to report
Form 3 holdings as a result of being appointed a Director of the Company and the
acquisition  of options to acquire 2,500 shares.  The Form 5 was sent for filing
on or about  January  13,  1998.  The Form 5 should have been filed on or before
November 14,  1997.  The Form 3 holdings  should have been  reported on a Form 3
filed on or before October 15, 1997.

         Richard C. Lambert,  a former officer of the Company,  acquired options
to purchase 20,000 shares of common stock of the Company on August 13, 1996. Mr.
Lambert filed a Form 4 to report the transaction on September 18, 1996. The Form
4 should have been filed on or before September 10, 1996.

         Raymond J. Weller,  the Chairman of the Board of the Company,  acquired
options to purchase  25,000  shares of common stock of the Company on August 13,
1996. Mr. Weller filed a Form 4 to report the transaction on September 18, 1996.
The Form 4 should have been filed on or before  September  10, 1996. 

         Steven R. Brown,  Vice President of Engineering and Construction of the
Company,  acquired  options to purchase  100,000  shares of common  stock of the
Company on August 13, 1996.  Mr. Brown filed a Form 4 to report the  transaction
on September 18, 1996. The Form 4 should have been filed on or before  September
10, 1996. 

         Alan  D.  Ayers,  Vice  President  of  Administration  of the  Company,
acquired  options to purchase  100,000  shares of common stock of the Company on
August 13, 1996. Mr. Ayers filed a Form 4 to report the transaction on September
18, 1996. The Form 4 should have been filed on or before  September 10, 1996. He
also sent a Form 5 for  filing on or about  January  13,  1998 to report  Form 3
holdings as a result of being  appointed an officer of the  Company.  The Form 3
should have been filed on or before August 10, 1996.

         Stanley M. Kimball,  Chief Financial Officer,  Treasurer and a Director
of the Company,  filed a Form 3 on January 21, 1997. The Form 3 should have been
filed on or before January 11, 1997. 

Mr. Kimball  acquired  options to purchase  50,000 shares of common stock of the
Company  on April 1,  1997.  He sent for  filing on or about  January  13,  1998
aquired  options.  The Form 5 should have been filed on or before  November  14,
1997.

                                       46
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

         The  following  sets forth the  compensation  paid by the  Company  for
services rendered by Brent M. Cook, the Company's  President and Chief Executive
Officer,  during the fiscal years ended  September  30, 1996 and  September  30,
1997. No other  executive  officer  received  compensation in excess of $100,000
during the most recently completed fiscal year.
 <TABLE>
 <CAPTION>

                                            Summary Compensation Table


Annual Compensation                                                                  Long-Term Compensation

                                                                   Other Annual      Restricted                        All Other
Name and                                                           Compensation      Stock           Stock Options     Compensation
Principal Position       Year        Salary($)     Bonus ($)       ($)               Awards ($)      (#)               ($)
------------------       ----        ---------     ---------       ----------------- ----------      ----------------  -------------
<S>                      <C>         <C>           <C>             <C>               <C>             <C>               <C>
Brent M. Cook (1)        1996        $23,335       $60,000         $1,163,000(2)     --              40,000(2)         --
President and CEO        1997         93,811       -- (3)          --                --              --                --
------------------
</TABLE>
(1)      Mr. Cook entered into an employment agreement dated June 1, 1996 to act
         as Executive Vice President and Chief Financial  Officer.  Mr. Cook was
         appointed as President and Chief Executive Officer in October of 1996.
(2)      Upon the execution of his employment  agreement  with the Company,  Mr.
         Cook received immediately exercisable options to acquire 100,000 shares
         of the  Company's  common  stock at a price of $1.50  per  share.  This
         amount represents $1,163,000 of compensation recorded by the Company as
         a result of the option  grant to Mr.  Cook.  Mr. Cook also  received an
         option to acquire  40,000  shares of the  Company's  common  stock at a
         price of $1.50 per share, which vests over 10 years.
(3)      Mr. Cook was awarded a  performance  based bonus of $50,000 in November
         1997,  which  has been  recorded  as a bonus in  fiscal  year 1998 and,
         accordingly, is not reflected in this table.

         Other  than  the  Company's  1995  Stock  Option  Plan,  there  are  no
retirement,  pension,  or profit  sharing plans for the benefit of the Company's
officers,  directors and  employees.  The Company does provide health and dental
insurance  coverage for its employees.  The Board of Directors may recommend and
adopt additional  programs in the future for the benefit of officers,  directors
and employees.

Option Grants in Fiscal Year 1997

         No options were granted to the named  executive  officer in fiscal year
1997.

Aggregated Option Exercises and Year-End Option Values in 1997

         The following table  summarizes for the named executive  officer of the
Company the number of stock options,  if any, exercised during fiscal year 1997,
the  aggregate  dollar  value  realized  upon  exercise,  the  total  number  of
unexercised options held at September 30, 1997 and the aggregate dollar value of
in-the-money unexercised options held at September 30, 1997. Value realized upon
exercise is the difference between the fair market value of the underlying stock
on the  exercise  date  and the  exercise  price  of the  option.  The  value of
unexercised,  in-the-money  options  at  September  30,  1997 is the  difference
between its exercise price and the fair market value of the underlying  stock on
September  30,  1997 which was $9.25 per share  based on the last trade price of
the common stock on September 30, 1997. The underlying options have not been and

                                       47
<PAGE>

may never be exercised. The actual gains, if any, on exercise will depend on the
value of the  common  stock on the  actual  date of  exercise.  There  can be no
assurance that these values will be realized.
<TABLE>
<CAPTION>

                                  Aggregated Option Exercises in Fiscal Year 1997
                                            and Year-End Option Values


                                                                          Number of               Value of Unexercised
                                                                     Unexercised Options           In-the-Money Options
                                                                        at 9/30/97(#)                at 9/30/97($)

                       Shares Acquired      Value
Name                   on Exercise(#)       Realized($)        Exercisable     Unexercisable     Exercisable      Unexercisable
----                   --------------       -----------        -----------     -------------     -----------      -------------
<S>                     <C>                 <C>                <C>             <C>               <C>              <C>
Brent M. Cook          -0-                  $-0-               104,000         36,000            $806,000         $ 279,000
</TABLE>

Long-Term Incentive Plan ("LTIP") Awards in Fiscal Year 1997

         The Company has no LTIP.

Future Benefits of Pension Plan Disclosure in Fiscal Year 1997

         The Company has no such benefit plans.

Employment  Contracts  and  Termination  of  Employment  and  Change in  Control
Arrangements

         Brent M. Cook. The Company entered into an employment agreement,  dated
June 1, 1996,  with Brent M. Cook to act as Executive  Vice  President and Chief
Financial  Officer.  Mr. Cook was subsequently  appointed as President and Chief
Executive  Officer of the Company in October of 1996. The  employment  agreement
extends  for a period of three years  terminating  on May 31,  1999.  During the
first,  second and third twelve month period,  Mr. Cook's regular monthly salary
will be $6,667 ($80,004  annualized),  $8,334  ($100,008  annualized) and $9,167
($110,004 annualized)  respectively.  Mr. Cook is entitled to participate in and
receive the benefits of bonus plans and other benefit plans generally  available
to Company employees. In November 1997, the Company's Board of Directors awarded
Mr. Cook a bonus of $50,000.  In accordance with the employment  agreement,  Mr.
Cook was issued stock options to purchase 100,000 shares of Company common stock
at a purchase  price per share of $1.50 in fiscal year 1996.  Also,  Mr. Cook is
entitled to an automobile allowance, medical and dental coverage, and should Mr.
Cook  die  during  the  term  of  his   employment   agreement,   his   personal
representative  or  designated  survivor  will be entitled to receive all of the
salary and benefits provided thereunder for the remaining term of the employment
agreement.  If Mr. Cook does not  continue  in the employ of the  Company  after
termination  of the  employment  agreement  (whether  or not Mr. Cook is offered
employment by the Company), the Company shall pay Mr. Cook the sum of one year's
annual wages no later than July 1, 1999.

         Max E.  Sorenson.  The Company  entered into an  employment  agreement,
dated  March  20,  1997,  with Max E.  Sorenson  to act as Vice  President.  The
employment  agreement  extends for a period of three years unless  terminated by
the Company for cause or death,  or by the employer for certain  Company actions
which  constitute  good  cause or without  good  reason  provided  60 days prior
written notice is given. During the first, second and third twelve month period,
Mr.  Sorenson's  regular  monthly  salary will be $6,667  ($80,004  annualized),
$10,833 ($129,996  annualized) and $10,833 ($129,996  annualized)  respectively.
Mr. Sorenson is entitled to receive a bonus pursuant to the Company's bonus plan
in effect from time to time. Further,  Mr. Sorenson will be issued stock options
to purchase  50,000 shares of Company common stock at a purchase price per share
of $1.50, vesting 25,000 immediately,  12,500 and 12,500 at the end of the first

                                       48
<PAGE>

and second twelve month period of  employment, respectively.  Additionally,  Mr.
Sorenson  receives  and  received a monthly car  allowance  of $550,  received a
signing bonus of $50,000, and may receive termination benefits at the expiration
of the employment  agreement  (whether or not Mr. Sorenson is offered employment
by the  Company  after the three  years)  equal to the sum of one year's  annual
wages. In addition,  Mr. Sorenson  received  options to acquire 50,000 shares of
common stock under the Option Plan (as defined below).

         Stanley M. Kimball.  The Company entered into an employment  agreement,
dated  January 1, 1997,  with  Stanley M. Kimball to act as Vice  President  and
Chief Financial Officer.  The employment agreement extends for a period of three
years  unless  terminated  by the  Company  for cause or  disability,  or by the
employee for certain  Company  actions which  constitute  good reason or without
good  reason  provided 90 days prior  written  notice is given.  Mr.  Kimball is
entitled to an annual base salary of at least  $80,000.  However,  the agreement
provides that Mr. Kimball's base salary shall be in line with the salary paid to
the President and Chief Executive  Officer of the Company.  Effective June 1997,
Mr.  Kimball's  annual base salary was  increased to $100,000.  Mr.  Kimball was
issued  stock  options to purchase  50,000  shares of Company  common stock at a
purchase  price per share of $1.50,  vesting  on a pro rata basis over two years
commencing  January 1, 1997 and ending  December  31,  1998.  Additionally,  Mr.
Kimball  receives a monthly car allowance of $550 and is entitled to termination
benefits equal to 200% of the then current  annual base salary if Mr.  Kimball's
employment  is  terminated  by the Company  without  cause or  terminated by Mr.
Kimball for good reason.  In addition,  Mr. Kimball  received options to acquire
50,000 shares of common stock under the Option Plan (as defined below).

Director Compensation

         The  salaried  employees of the Company  serving as  Directors  are not
compensated  as  Directors.  The Board of Directors has granted stock options to
Directors of the Company not otherwise  employed by the Company.  Such Directors
also receive a cash fee of $500 per meeting and  reimbursement  of out-of-pocket
expenses.

Stock Option Plans

         1995 Stock Option Plan.  Under the Company's 1995 Stock Option Plan, as
amended (the "Option Plan"), 2,400,000 shares of common stock (900,000 shares in
June 1995 plus 1,500,00  approved by  shareholders in January 1996) are reserved
for issuance upon the exercise of stock options.  The Option Plan is designed to
serve as an incentive for retaining qualified and competent employees, directors
and  consultants.  During fiscal year 1997, the Company issued options under the
Option Plan to acquire  280,000  shares of common stock to 10 employees.  Of the
options to purchase  280,000  shares,  Mr. Dee J.  Priano was issued  options to
purchase  100,000  shares  at an  exercise  price of $8.25  per  share  and nine
employees  were issued  options to purchase an aggregate of 180,000 shares at an
exercise price of $8.25 per share.  Out of the nine employees,  Messrs.  Kimball
and Sorenson each received  options to purchase  50,000 shares.  As of September
30, 1997, options to purchase an aggregate of approximately  1,180,000 shares of
common  stock were issued  under the Option  Plan,  of which  900,000  have been
exercised.

         A committee of the Company's Board of Directors, or in its absence, the
Board (the  "Committee")  administers  and  interprets  the  Option  Plan and is
authorized  to  grant  options  and  other  awards  thereunder  to all  eligible
employees  of the Company,  including  officers  and  directors  (whether or not
employees)  of the  Company.  The Option Plan  provides for the granting of both
"incentive  stock  options"  (as  defined  in  Section  422  of  the  Code)  and
non-statutory  stock  options.  Options can be granted  under the Option Plan on
such terms and at such prices as determined by the Committee, except for the per
share exercise price of incentive  stock options which will not be less than the
fair market  value of the common  stock on the date of grant and, in the case of
an incentive stock option granted to a 10% stockholder, the per share exercise

                                       49
<PAGE>

price will not be less than 110% of such fair market value.  The aggregate  fair
market value of the shares of common stock  covered by incentive  stock  options
granted under the Option Plan that become exercisable by a grantee for the first
time in any calendar year is subject to a $100,000 limit.

         Options  granted  under the Option Plan will be  exercisable  after the
period or periods specified in the option  agreement.  Options granted under the
Option Plan are not exercisable  after the expiration of ten years from the date
of grant and are not  transferable  other than by will or by the laws of descent
and distribution.

         Other Options. In addition to options issued under the Option Plan, the
Company has granted  options to  executive  officers,  employees  and  directors
outside the Option Plan that were not  qualified  for tax  purposes,  all as set
forth below in more detail.

         The following table sets forth information with respect to such options
granted to the Company's  executive  officers and  directors  during fiscal year
1997:


                                  Number of                Exercise
       Name                         Options                  Price
---------------------             -------------          --------------


Stanley M. Kimball                    50,000                $1.50

Max E. Sorenson                       50,000                $1.50

Vern T. May                            2,500                $1.50

Raymond J. Weller                      2,500                $1.50

DeLance W. Squire                      2,500                $1.50

James A. Herickhoff                    2,500                $9.00

         Shares  related to  exercised  options  are held in escrow and are made
available as the options  vest.  The options vest at different  times based upon
the terms offered with some options vesting immediately and others over terms of
up to 10 years.  In the event that an executive  officer or employee  terminates
employment with the Company, or a director ceases to be a director, prior to the
specified vesting period, the Company will cancel any of the shares in which the
recipient  has not  vested.  When  options  are  issued  with  terms  considered
compensatory,  the  compensation  expense  related  to  these  options  is being
amortized to expense over the specified vesting period.

Board Meetings

         The Board held a total of eleven  regular  meetings  during fiscal year
1997 and one special  meeting  during fiscal year 1997.  All directors  attended
over 75% of the aggregate number of the regular meetings of the Board.

Committees Of The Board

         As of September 9, 1997,  the Board of Directors  established  an Audit
Committee and a Compensation  Committee.  The Compensation Committee consists of
Mr.  May,  as  chair,  and Mr.  Weller.  The  Audit  Committee  consists  of Mr.
Herickhoff, as chair, Mr. Squire, and Mr. Hill. The  board elected  to  organize

                                       50
<PAGE>

the Compensation  Committee and Audit Committee  solely with outside  directors.
The  Audit   Committee  held  its  first  meeting  on  December  16,  1997.  The
Compensation Committee did not hold any meetings in fiscal year 1997.

Compensation Committee Report on Executive Compensation

         As of  September  9,  1997,  the  Company  established  a  Compensation
Committee consisting of two members of the Board of Directors.  The Compensation
Committee is responsible for overseeing the institution of compensation relating
to the Company's officers and key personnel,  including the named executives. In
the past,  because  of cash  flow  concerns  of the  Company,  the  Compensation
Committee has not implemented changes in the Company's  compensation  structure.
Future  compensation  polices will be dependent on the  Company's  cash flow and
employee performance.

         The Committee is currently  reviewing  compensation  guidelines  and is
considering retention of an outside company to recommend and bid on compensation
and benefit  services.  Any program  recommended  will consider  factors such as
current  competitive  market  compensation,  growth of the  Company  and overall
business conditions as part of the total benefit package for employees.

         The  Compensation  Committee  strives  to  ensure  that  the  Company's
compensation  plan  attracts,  retains  and  rewards  both staff and  management
personnel while continuing to operate in the best interests of the stockholders.

                                              Compensation Committee,

                                              Vern T. May, Chairman
                                              Raymond J. Weller
                                              January 5, 1998

Stockholder Return Performance Graph

         Federal regulation requires the inclusion of a line graph comparing the
yearly percentage change in the Company's cumulative total stockholder return on
the common stock with the  cumulative  total return,  assuming  reinvestment  of
dividends,  of (1) the  NASDAQ  Composite  Index  and (2) a  published  industry
orline-of-business  index. The comparison assumes $100 was invested on September
30, 1994. The performance comparison appears below.

         The Board of  Directors  recognize  that the  market  price of stock is
influenced by many factors, only one of which is Company performance.  The stock
price  performance  shown on the graph is not  necessarily  indicative of future
price performance. The Company has not paid dividends on its common stock.

                                       51
<PAGE>

                      Comparison of Cumulative Total Return

                               [GRAPHIC OMITTED]

                 Total Returns Assume Reinvestment of Dividends


<TABLE>
<CAPTION>

                                9/30/94           9/30/95             9/30/96             9/30/97
                          --------------------------------------------------------------------------
<S>                               <C>              <C>                <C>                  <C>
COVOL                            $100              $230               $265                 $296

S&P ENERGY COMPOSITE              100               120                150                  220

NASDAQ COMPOSITE (US)             100               137                161                  221
</TABLE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following  table sets forth certain  information as of December 15,
1997,  regarding the  beneficial  ownership of all of the Company's  outstanding
common  stock,  par value  $.001 per share,  for:  (i) each  person (or group of
affiliated  persons)  who,  insofar as the Company  has been able to  ascertain,
beneficially  owned more than 5% of the outstanding shares of common stock; (ii)
each  director  and  named  executive  officer  of the  Company;  and  (iii) all
directors  and  executive  officers of the  Company as a group.  The Company has
relied on information received from each stockholder as to beneficial ownership,
including  information  contained on  Schedules  13D and Forms 3, 4 and 5. As of
December 15, 1997, there were 9,298,175 shares of common stock  outstanding.  As
of that date,  there were  outstanding  options to purchase  1,631,500 shares of
common  stock,  of which  681,793 were vested,  warrants to purchases  1,718,933
shares of common stock, of which 1,295,183 were in the money,  debt  convertible
into  1,090,908  shares of common stock and  preferred  stock  convertible  into
994,037 shares of common stock.

                                       52
<PAGE>

    Name and Address of             Amount and Nature of
    Beneficial Owner (1)            Beneficial Ownership (2)    Percent of Class
   --------------------           ------------------------      ----------------

PacifiCorp Financial Services, Inc.     857,143(3)                     8.44%
775 NE Multnomah, Suite 775
Portland, OR  97232

Diamond Jay Ltd. Co.                    514,285(4)                     5.24
c/o Trans Pacific Stores, Ltd.
555 Zang Street
Lakewood, CO  80228

Joe K. Johnson                          486,346(5)                     5.00
8989 S. Schofield Circle
Sandy, Utah  84093

Brent M. Cook                           108,000(6)                     1.15

Stanley M. Kimball                       59,126(7)                      *

Alan D. Ayers                            44,500(8)                      *

George W. Ford, Jr.                     134,700(9)                     1.45

Steven R. Brown                         93,600(10)                      *

Russell G. Madsen                      470,461(11)                     4.11

Max E. Sorenson                         33,334(12)                      *

Dee J. Priano                           24,000(13)                      *

Asael T. Sorensen, Jr.                  90,424(14)                      *

Raymond J. Weller                      266,465(15)                     2.86

DeLance W. Squire                        2,500(16)                      *

Vern T. May                              2,500(16)                      *

James A. Herickhoff                      2,500(16)                      *

John P. Hill, Jr.                        2,500(16)                      *

All directors and executive
officers as a group
(fourteen (14) persons)              1,334,610                        13.83
------------------

 *       Less than 1%

 (1)     Unless  otherwise  indicated,  the address of each person  named in the
         table is c/o the Company, 3280 North Frontage Road, Lehi, Utah 84043.

 (2)     The persons named in this table have sole voting and  investment  power
         with  respect to all shares of common stock  reflected as  beneficially
         owned by  them.  A  person  is  deemed  to be the  beneficial  owner of
         securities  that can be acquired by such person  within sixty (60) days
         from December 15, 1997 upon the exercise of options. The record

                                       53
<PAGE>

         ownership  of each  beneficial  owner is  determined  by assuming  that
         options  that are held by such person and that are  exercisable  within
         sixty  (60) days from  December  15,  1997  have  been  exercised.  The
         beneficial  ownership  does  not  include  any  options  that  are  not
         exercisable  within 60 days of the reported date. The total outstanding
         shares used to calculate each beneficial  owner's  percentage  includes
         such options.

 (3)     Consists of approximately  857,143 shares of common stock issuable upon
         funding  of the loan from  PacifiCorp  Financial  Securities,  Inc.  to
         $6,000,000 and conversion to common stock at $7.00 per share.

 (4)     Consists of  approximately  85,714 shares of common stock,  issuable on
         exercise  of warrants to acquire  common  stock at a purchase  price of
         $8.00  per share  and  428,571  shares  of  common  stock  issuable  on
         conversion of the Company's Series A 6% Convertible Preferred Stock.

 (5)     Consists of 54,547 shares owned by Mr. Johnson and warrants to purchase
         431,799 shares held by Mr. Johnson which are currently exercisable.

 (6)     Consists of  options to  purchase 108,000  shares which  are  currently
         exercisable.

 (7)     Consists of 1,200 shares  owned by Mr.  Kimball and options to purchase
         57,926 shares which are currently exercisable.  Lee Kimball, the son of
         Mr.  Kimball, owns 250 shares of which Mr. Kimball disclaims beneficial
         ownership.

 (8)     Consists of 30,000 shares owned by Mr. Ayers, 1,700 shares owned by Mr.
         Ayers' individual  retirement  account,  800 shares owned by Mr. Ayers'
         spouse and options to purchase  12,000  shares held by Mr.  Ayers which
         are currently exercisable.

 (9)     Consists  of 124,700  shares  owned by Mr. Ford and options to purchase
         10,000 shares held by Mr. Ford which are currently exercisable.

 (10)    Consists of 76,100  shares  owned by Mr.  Brown and options to purchase
         17,500 shares held by Mr. Brown which are currently exercisable.

 (11)    Consists of 410,140 shares owned by Mr. Madsen, 213 shares owned by Mr.
         Madsen's  spouse,  12,608 shares owned by Mr. Madsen in an IRA account,
         and options to purchase  47,500  shares  held by Mr.  Madsen  which are
         currently  exercisable.  Melissa Baker, the daughter of Mr. Madsen, and
         her husband  own 526 shares of which Mr.  Madsen  disclaims  beneficial
         ownership.

 (12)    Consists of  options to  acquire  33,334  shares  which  are  currently
         exercisable.

 (13)    Consists  of  options to  acquire  24,000  shares which  are  currently
         exercisable.

 (14)    Consists of 44,450 shares owned by Mr. Sorensen, 28,474 shares owned by
         Mr.  Sorensen,  his wife and his  children  in trust,  and  options  to
         purchase  17,500  shares  held  by Mr.  Sorensen  which  are  currently
         exercisable.

 (15)    Consists of 253,965  shares owned by Mr. Weller and options to purchase
         12,500 shares held by Mr. Weller which are currently exercisable.

 (16)    Consists of  options  to  purchase  2,500 shares  which  are  currently
         exercisable.

                                       54
<PAGE>

Changes in Control.

         The Company knows of no arrangement, including the pledge by any person
of securities of the Company, which may at a subsequent date result in change of
control of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         PacifiCorp.  During fiscal year 1997, the Company  entered into various
transactions  with  PacifiCorp  Financial  Services,  Inc.  and  certain  of its
affiliates  ("PacifiCorp").  The  transactions  include (i) the Alabama Purchase
Agreement (see "ITEM 1. BUSINESS--Business of Company--Alabama Plant"), (ii) the
PacifiCorp  Convertible  Loan  Agreement  and related  agreements  (see "ITEM 7.
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources"), and (iii) the PacifiCorp licenses
(see "ITEM 1. BUSINESS--Business of Company--License  Agreements").  As a result
of the PacifiCorp Convertible Loan Agreement, PacifiCorp is the beneficial owner
of approximately  857,143 shares  (approximately  8.44%) of the Company's common
stock.

         Gallagher.  During fiscal year 1997,  the Company  entered into various
transactions  with Arthur J.  Gallagher & Company and certain of its  affiliates
("Gallagher").  The  transactions  include (i) the Utah Purchase  Agreement (see
"ITEM 1.  BUSINESS--Business of Company--Utah Plant"), (ii) the Gallagher Senior
Debentures and Subordinated Debentures (see "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources") and (iii) the Gallagher licenses (see "ITEM 1. BUSINESS--Business of
Company--License Agreements.")

         Extension of Warrants.  During fiscal year 1997,  the Company agreed to
extend  the  exercise  period  of  warrants  to  acquire  431,799  shares of the
Company's  common  stock  held  by  Joe  K.  Johnson,   a  beneficial  owner  of
approximately  5% of the outstanding  common stock of the Company and a director
of the Company until July 17, 1997. The warrants are now exercisable  until June
30, 1999 as follows: (i) warrants to purchase 110,250 shares at $7.00 per share;
(ii) warrants to purchase  71,332 shares at $10.00 per share;  (iii) warrants to
purchase  65,215  shares at $15.00  per share;  and (iv)  warrants  to  purchase
185,002  shares at $30.00  per  share.  Prior to the  extension  granted  by the
Company, the warrants were to expire on December 31, 1998.

         Employment   Agreements.   The  Company  has  entered  into  employment
agreements with Messrs. Cook, Sorenson and Kimball which provide for significant
benefits.  See  "ITEM  11.  EXECUTIVE   COMPENSATION--Employment  Contracts  and
Termination of Employment and Change in Control Arrangements."

         $500,000 Loan from Certain Officers.  In November 1996, Steven R. Brown
loaned $280,000 and Asael T. Sorensen,  Jr. loaned $220,000 to the Company which
accrues  interest  at  approximately  prime  plus 2% per  annum.  Principal  and
interest  is due on or before  November  26,  2002.  As of  December  15,  1997,
approximately  $100,000 has been paid by the Company toward the repayment of the
loans.  The  purpose  of the loans  were to provide  operating  capital  for the
Company.

         Related Partnerships. In June 1996, the Company formed Utah Synfuel #1,
Ltd. ("US #1") and Alabama Synfuel #1, Ltd. ("AS #1"),  each a Delaware  limited
partnership,  for the purpose of facilitating  the financing and construction of
the Utah Plant and the Alabama Plant,  respectively.  See "ITEM 1. BUSINESS--The
Company--Partnerships" and "--Business of Company--Alabama Plant, --Utah Plant."
In connection with the sale of the Utah Plant under the Utah Purchase Agreement,

                                       55
<PAGE>

the Company transferred the Utah Plant to US #1 and ranted US #1 a non-exclusive
license to the Briquetting Technology.  In exchange for the transfer of the Utah
Plant and license  granted by the  Company,  the  Company  received a payment of
$500,000 from US #1. The Company anticipates that similar  transactions  between
the  Company  and AS #1 will occur with  respect to the  Alabama  Plant upon the
closing of the Alabama  Purchase  Agreement,  if that agreement is  consummated.
These transactions are not based on an arms-length negotiation by the parties.

         Key Bank Loan. In an effort to obtain capital for the  construction  of
the Utah Plant and the Alabama  Plant,  the Company  borrowed  $700,000 from Key
Bank of Utah ("Key  Bank").  The loan accrued  interest at Key Bank's prime rate
plus 2% per annum and was to be paid in full in October  1996.  In November 1996
the Company paid accrued  interest plus  principal of $100,000.  The Company and
Key Bank agreed to rollover the remaining $600,000 principal balance of the loan
for another 90 days,  until January 29, 1997, which was later extended until May
30, 1997.  Additional  payments of principal and interest were paid in March and
May, 1997 totalling  $110,000.  Key Bank thereafter notified the Company that it
was in default on the loan.  The Company paid off the  principal and interest on
the loan in the amount of $522,516 on August 20, 1997.  As a condition to making
the loan,  Key Bank required that certain  officers,  directors and employees of
the Company also sign as  guarantors of the note  evidencing  the loan (the "Key
Bank  Note").  To  induce  such  officers,   directors  and  employees  to  sign
individually  and be severally  liable on the Key Bank Note,  the Company loaned
$100,000 each to Mr.  Russell G. Madsen,  Mr. Dean Young,  Mr. Kenneth M. Young,
Mr. Alan D. Ayers,  Mr.  Asael T.  Sorensen,  Jr.,  Mr.  Steven R. Brown and Mr.
Michael Q. Midgley (the  "Individuals").  The loan to the  Individuals is on the
same terms as the loan from Key Bank.  The proceeds of the loan from the Company
to the  Individuals,  along  with  other  money of the  Individuals  aggregating
$1,850,000,  were  invested  in  partnership  interests  in US #1 and AS #1. Mr.
Russell G. Madsen invested  $50,000 of the loan in AS #1 and $50,000 of the loan
in US #1. The remaining Individuals invested the full amount of their respective
loans in US #1.  The  Company  has not  received  any direct  payments  from the
Individuals.  On March 21, 1997,  US #1 made cash  distributions  to each of the
limited  partners  of US #1 in  the  aggregate  amount  of  $272,000.  The  cash
distributions  attributable to the interests in US #1 acquired  through the loan
to the  Individuals  as  described  above were made  directly to the Company and
applied  against the  principle  and interest due from the  Individuals.  Future
distributions,  if any,  from US #1 will be applied  first  against  the amounts
owing  from  the  Individuals  before  distributions  are made  directly  to the
Individuals.

         Settlement  Agreement with Former CEO. In November of 1996, the Company
entered into a settlement  agreement with Kenneth M. Young, the Company's former
Chief  Executive  Officer and Chairman of the Board.  Pursuant to the settlement
agreement, the Company agreed: (i) to pay Mr. Young $4,000 twice a month through
December  31,  1996,  (ii)  to pay  $25,030  in  deferred  compensation  over 24
semi-monthly  installments of $1,042 beginning January 1, 1997, (iii) to pay for
Mr.  Young's  medical  insurance  until  December 31,  1997,  (iv) to pay $2,500
semi-monthly  for 24 payments  beginning  January 1, 1997 in  consideration  for
consulting  services  reasonably  requested  by  the  Company  and  Mr.  Young's
agreement to refrain from any activities in competition with the Company, (v) to
allow options  representing  50,000 shares of Company  common stock at $1.50 per
share to become fully vested on January 1, 1997 (these  options were  originally
issued under a stock option  agreement dated January 1, 1995 relating to 250,000
shares of which the remaining  200,000 options were rescinded) and (vi) to allow
options representing 50,000 shares of Company common stock at $1.50 per share to
become fully vested on January 1, 1997 (these  options  were  originally  issued
under a stock option  agreement dated January 1, 1995 relating to 62,500 shares,
of which the remaining 12,500 options were rescinded).

         Settlement  Agreement  with Former  Officer.  In November of 1996,  the
Company  entered  into a  settlement  agreement  with  Michael Q.  Midgley,  the
Company's  former  President  and  Chief  Financial  Officer.  Pursuant  to  the
settlement  agreement,  the Company agreed:  (i) to pay $20,000 in November 1996
and $38,479 in salary,  deferred  compensation  and unused  vacation pay over 24

                                       56
<PAGE>

semi-monthly  installments  of $1,605  beginning  November 15, 1996, (ii) to pay
$2,500  semi-monthly for 24 payments  beginning January 1, 1997 in consideration
for consulting  services  reasonably  requested by the Company and Mr. Midgley's
agreement to refrain from any activities in competition with the Company,  (iii)
to allow options representing 50,000 shares of Company common stock at $1.50 per
share to become fully vested on January 1, 1997 (these  options were  originally
issued under a stock option  agreement dated January 1, 1995 relating to 350,000
shares of which the remaining  300,000 options were rescinded) and (iv) to allow
options representing 25,000 shares of Company common stock at $1.50 per share to
become fully vested on January 1, 1997 (these  options  were  originally  issued
under a stock option  agreement dated January 1, 1996 relating to 50,000 shares,
of which the remaining 25,000 options were rescinded).

         Ferro  Resources.  Max E.  Sorenson,  a Vice  President of the Company,
beneficially  owns Ferro  Resources,  L.L.C., a Utah limited  liability  company
("Ferro").  The Company and Sorenson have entered into discussions regarding the
sale  of the  membership  interests  in  Ferro  to the  Company.  See  "ITEM  1.
BUSINESS--Business   of   Company--Joint   Ventures--Ferro   Resources."   These
transactions are not based on an arms-length negotiation by the parties.

         Option  Exercise  Notes.  In fiscal  year  1995,  the  Company  entered
into laon  agreements  with 16 current  and former  employees  of the Company in
payment of the exercise  price of options to purchase  900,000 shares of Company
common stock.  Out of the 16  individuals,  9 are current or former officers and
directors in fiscal year 1997. Specifically Messrs. Madsen, Ford, Brown, Weller,
Sorensen,  Ayers, Lambert,  Young and Midgley are indebted to the Company in the
principal amounts of $516,875, $488,519, $388,519, $417,265, $322,503, $251,250,
$279,318, $587,765 and $516,875 respectively. The promissory notes bear interest
at 5.7% per annum with  principal  and  interest  due in  December  2000 and are
collateralized by the shares purchased.

                                       57
<PAGE>

                                     PART IV

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

(a)      1.       Financial Statements

Consolidated Financial Statements of Covol Technologies, Inc.

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

Consolidated Balance Sheets as of September 30, 1995, 1996 and
         September 30, 1997..............................................   F-2

Consolidated Statements of Operations
         for the years ended September 30, 1995, 1996 and 1997...........   F-4

Consolidated Statements of Changes in Stockholders' Equity
         for the years ended September 30, 1995, 1996 and 1997...........   F-6

Consolidated Statements of Cash Flow
         for the years September 30, 1995, 1996 and 1997.................  F-11

Notes to Consolidated Financial Statements...............................  F-13

All other  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.

2.       Exhibits

         All  exhibits  listed  hereunder,   unless  otherwise  indicated,  have
previously  been filed as exhibits  to the  Company's  Form 10, Form 10/A,  Form
10-K,  Form  10-Qs,  and Form  8-Ks.  Such  exhibits  have been  filed  with the
Securities and Exchange Commission  ("Commission")  pursuant to the requirements
of the Acts  administered  by the  Commission.  Such  exhibits are  incorporated
herein by  reference  under Rule 24 of the  Commission's  Rules of Practice  and
Investigations.  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 the
Company and its  subsidiaries on a consolidated  basis and the Company agrees to
furnish a copy of any such instrument to the Commission upon request.

         Exhibits 10.11.3,  10.11.4 , 10.39.2,  10.39.5 , 10.42,  10.45,  10.46,
10.47, 10.48, 10.49 and 10.50 , contain confidential  information which has been
omitted pursuant to a Confidential  Treatment  Request filed separately with the
Securities and Exchange Commission.

                                       58
<PAGE>

                        Report of Independent Accountants


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

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Covol
Technologies,  Inc. and  Subsidiaries as of September 30, 1996 and 1997, and the
consolidated   statements  of  operations,   changes  in  stockholders'   equity
(deficit),  and cash flows for the years ended  September  30, 1995,  1996,  and
1997.  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  in  accordance  with  generally   accepted  auditing
standards.  Those standards 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the   consolidated   financial   position  of  Covol
Technologies,  Inc. and  Subsidiaries as of September 30, 1996 and 1997, and the
consolidated  results  of their  operations  and their  cash flows for the years
ended September 30, 1995,  1996 and 1997, in conformity with generally  accepted
accounting principles.


Salt Lake City, Utah
December 31, 1997

                                      F-1

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        as of September 30, 1996 and 1997


                                                                                  1996                  1997
                                                                            ----------------      ---------------
  ASSETS

Current assets:
<S>                                                                          <C>                    <C>
  Cash and cash equivalents                                                  $      490,106         $   4,780,301
  Receivables                                                                        77,744                12,595
  Receivable - stock subscriptions                                                     -                  577,500
  Inventories                                                                       162,757             1,818,991
  Advances on inventories                                                              -                1,086,964
  Notes receivable - related parties, current                                         3,733               275,516
  Prepaid expenses and other current assets                                          44,733                51,865
                                                                             --------------         -------------
         Total current assets                                                       779,073             8,603,732
                                                                             --------------         -------------

Property, plant and equipment, net of
  accumulated depreciation                                                        7,125,245            13,619,271
                                                                             --------------         -------------

Other assets:
  Cash surrender value of life insurance                                            152,112               184,592
  Notes receivable - related parties, non-current                                   700,000             3,816,604
  Deposits and other assets                                                          15,642               136,615
                                                                             --------------         -------------
         Total other assets                                                         867,754             4,137,811
                                                                             --------------         -------------

         Total assets                                                        $    8,772,072         $  26,360,814
                                                                             ==============         =============

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

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

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                  as of September 30, 1996 and 1997, Continued

                                                                                  1996                  1997
                                                                             ---------------        -------------

  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
<S>                                                                           <C>                   <C>
  Accounts payable                                                            $   2,183,278         $   1,045,147
  Payable for coal briquetting equipment                                               -                1,967,686
  Due to related party                                                                 -                1,038,667
  Accrued liabilities                                                               333,936             1,023,126
  Accrued contractor liability                                                         -                1,477,000
  Notes payable and convertible debentures, current                                 958,086             5,247,526
  Notes payable - related parties, current                                          786,000                  -
                                                                             --------------         -------------
         Total current liabilities                                                4,261,300            11,799,152
                                                                             --------------         -------------

Long-term liabilities:
  Accrued interest                                                                     -                  204,402
  Notes payable and convertible debentures, non-current                             150,980             2,900,000
  Notes payable - related parties, non-current                                         -                  489,096
  Deferred revenues from advance licensing fees                                        -                1,650,000
  Deferred compensation                                                             212,612               223,891
                                                                             --------------         -------------
         Total long-term liabilities                                                363,592             5,467,389
                                                                             --------------         -------------

         Total liabilities                                                        4,624,892            17,266,541
                                                                             --------------         -------------

Minority interest in consolidated subsidiaries                                    4,380,544             3,165,996
                                                                             --------------         -------------

Commitments and contingencies

Stockholders' equity (deficit):
  Preferred stock, $0.001 par value:  authorized  10,000,000 shares,  issued and
     outstanding 0 shares at September 30, 1996 and 303,024  shares at September
     30, 1997 (aggregate liquidation
     preference of $5,125,914 at September 30, 1997)                                   -                      303
  Common stock, $0.001 par value: authorized 25,000,000 shares,
     issued and outstanding 7,610,373 shares at September 30,
     1996 and 8,627,290 shares at September 30, 1997                                  7,610                 8,627
  Common stock to be issued, 103,750 shares at September 30, 1996
     and 462,285 shares at September 30, 1997                                           104                   462
  Capital in excess of par value - preferred                                           -                5,094,634
  Capital in excess of par value - common                                        32,780,515            41,818,549
  Capital in excess of par value - common stock to be issued                        934,896             3,291,783
  Accumulated deficit                                                           (21,196,476)          (32,191,556)
  Notes and interest receivable - related parties from issuance
     of or collateralized by common stock (net of allowance)                     (7,580,071)           (7,411,278)
  Deferred compensation from stock options                                       (5,179,942)           (4,683,247)
                                                                             --------------         -------------
         Total stockholders' equity (deficit)                                      (233,364)            5,928,277
                                                                             --------------         -------------

         Total liabilities and stockholders' equity (deficit)                $    8,772,072         $  26,360,814
                                                                             ==============         =============

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

                                                       F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF OPERATIONS


                                                          Year ended           Year ended            Year ended
                                                         September 30,        September 30,         September 30,
                                                             1995                 1996                  1997
                                                         -------------        -------------         -------------
Revenues:
<S>                                                        <C>                  <C>                  <C>
  License fees                                             $   100,000          $    100,000                 -
  Synthetic fuel sales, net                                     29,310               195,165         $     41,841
  Binder sales - related party                                    -                     -                 208,836
                                                           -----------          ------------         ------------

           Total revenues                                      129,310               295,165              250,677
                                                           -----------          ------------         ------------

Operating costs and expenses:
  Cost of coal briquetting operations                           37,165               859,574            4,803,248
  Research and development                                   1,265,072             1,044,192              663,935
  Selling, general and administrative                        1,494,270             3,796,569            2,997,812
  Compensation expense on stock options, stock
     warrants or issuance of common stock                      955,973             4,873,319            2,058,126
  Write-off of purchased technology and trade secrets          344,900                  -                    -
  Write-down of note receivable - related parties
     collateralized by common stock                               -                2,699,575               60,000
  Loss on sale of facility                                        -                     -                 581,456
                                                           -----------          ------------         ------------

           Total operating costs and expenses                4,097,380            13,273,229           11,164,577
                                                           -----------          ------------         ------------

           Operating loss                                   (3,968,070)          (12,978,064)         (10,913,900)
                                                           -----------          ------------         ------------

Other income (expense):
  Interest income                                                9,663               302,565              286,174
  Interest expense                                            (113,137)              (94,706)          (1,645,195)
  Minority interest in net losses of
   consolidated subsidiaries                                      -                    4,456            1,245,226
  Other income (expense)                                        35,169              (166,066)              32,615
                                                           -----------          ------------         ------------

           Total other income (expense)                        (68,305)               46,249              (81,180)
                                                           -----------          ------------         ------------

Loss from continuing operations before income tax           (4,036,375)          (12,931,815)         (10,995,080)

Income tax provision                                          (488,000)              (23,000)                -
                                                           -----------          ------------         ------------

Loss from continuing operations                             (4,524,375)          (12,954,815)         (10,995,080)

Discontinued operations (Note 15):
  Loss from discontinued operations including
     provision  of  $330,000  in 1995  for  estimated  operating  losses  during
     phase-out period (less applicable income tax (provision) benefit of
     $(297,800), $253,000 and $0 respectively)                (351,782)             (590,480)                -

  Loss on disposal of discontinued operations (less
     applicable income tax benefit of $562,000 in
     1995 and $0 in 1996)                                     (777,394)             (291,025)                -
                                                           -----------          ------------         ------------

Loss from discontinued operations                           (1,129,176)             (881,505)                -
                                                           -----------          ------------         ------------

           Net loss                                        $(5,653,551)         $(13,836,320)        $(10,995,080)
                                                           ===========          ============         ============

                                                 - Continued -

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

                                                       F-4
</TABLE>
<PAGE>
<TABLE>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF OPERATIONS, Continued


                                                          Year ended           Year ended            Year ended
                                                         September 30,        September 30,         September 30,
                                                             1995                 1996                  1997
                                                       ----------------     ----------------      ----------------
Net loss per common share:
<S>                                                    <C>                 <C>                    <C>
  Loss per share from continuing operations            $         (1.00)    $           (1.86)     $         (1.38)

  Loss per share from discontinued operations                    (0.25)                (0.13)                -
                                                       ---------------     -----------------      ---------------

Net loss per share                                     $         (1.25)    $           (1.99)     $         (1.38)
                                                       ===============     =================      ===============

Weighted average shares outstanding                          4,524,056             6,941,424            8,080,102
                                                       ===============     =================      ===============

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

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

                                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


                                                                                                             Notes and
                                                                                                             interest
                                                                                                            receivable -    Deferred
                                                                  Common stock to be issued               related parties    compen-
                                                      Capital in                   Capital in   Accumu-  from issuance of,   sation
                                  Common Stock        excess of                    excess of    lated   or collateralized   on stock
                               Shares       Amount    par value   Shares   Amount  par value   deficit   by, common stock    options
                               ------       ------    ---------   ------   ------  ---------   -------   ----------------    -------
<S>                          <C>           <C>       <C>         <C>       <C>    <C>       <C>            <C>               <C>
Balances at
 September 30, 1994          3,935,584     $ 3,936   $4,092,198  175,000   $ 175  $ 699,825 $(1,706,605)   $ (100,000)       $    0

Common stock issued for
 acquisition of subsidiary     175,000         175      699,825 (175,000)   (175)  (699,825)

Common stock issued to
 repay notes payable            47,618          47       99,953

Common stock issued
 for equipment                   3,870           4       10,300

Common stock issued to repay  advances  from officers and  directors,  including
 shares issued upon exercise of stock
 options                        95,602          96       95,517

Common stock issued
 for notes receivable           56,000          56      139,944                                              (140,000)

Common stock issued
 for services                   60,690          61      114,638

Common stock issued for services  rendered by officers and directors,  including
 shares issued upon exercise of stock
 options                        24,000          24       23,976

Common stock to be
 issued for services
 already received                                                 50,000      50    321,950

Common stock  issued and to be issued to  officers,  directors  and others,  for
 cash, including shares issued upon exercise of stock
 options                       861,678         861    1,963,339   69,334      69    259,931

Deferred compensation
 related to the issuance
 of stock options at
 below market value to
 officers and directors                               1,888,750                                                          (1,888,750)

                                                 - Continued -

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

                                                       F-6

<PAGE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued


                                                                                                             Notes and
                                                                                                             interest
                                                                                                            receivable -    Deferred
                                                                  Common stock to be issued               related parties    compen-
                                                      Capital in                   Capital in   Accumu-  from issuance of,   sation
                                  Common Stock        excess of                    excess of    lated   or collateralized   on stock
                               Shares       Amount    par value   Shares   Amount  par value   deficit   by, common stock    options
                               ------       ------    ---------   ------   ------  ---------   -------   ----------------    -------
<S>                          <C>           <C>       <C>         <C>       <C>    <C>       <C>            <C>               <C>
Compensation expense
 related to the issuance
 of stock for services
 at below market value                               $  148,447

Compensation expense
 related to the issuance
 of stock options at below
 market value                                           236,625

Compensation expense
 related to the issuance
 of stock warrants at
 below market value                                     104,000

Amortization of deferred
 compensation on
 stock options                                                                                                          $   466,902

Net loss for the year
 ended September 30, 1995                                                                   $(5,653,551)
                             ---------      ------   ----------  -------   -----   -------- -----------   -----------   -----------
Balances at
 September 30, 1995          5,260,042      $5,260   $9,617,512  119,334   $ 119   $581,881 $(7,360,156)  $  (240,000)  $(1,421,848)

Common stock issued
 for services                  114,517         114      769,191  (50,000)    (50)  (321,950)

Common stock issued
 for notes receivable
 from related parties,
 including exercise
 of stock options            1,010,000       1,010    6,283,365                                            (6,284,375)

Common stock issued
 for cash, including
 exercise of stock
 options and warrants        1,225,814       1,226    7,479,034  (69,334)    (69)  (259,931)

Common stock to be
 issued for cash
 already received                                                 43,750      44    349,956

Common stock to be
 issued for property
 acquired                                                         60,000      60    584,940

                                                 - Continued -

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

                                                      F-7

<PAGE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued


                                                                                                             Notes and
                                                                                                             interest
                                                                                                            receivable -    Deferred
                                                                  Common stock to be issued               related parties    compen-
                                                      Capital in                   Capital in   Accumu-  from issuance of,   sation
                                  Common Stock        excess of                    excess of    lated   or collateralized   on stock
                               Shares       Amount    par value   Shares   Amount  par value   deficit   by, common stock    options
                               ------       ------    ---------   ------   ------  ---------   -------   ----------------    -------
<S>                          <C>           <C>       <C>         <C>       <C>    <C>       <C>            <C>               <C>
Cash received in
 payment on notes
 receivable - related
 parties from issuance
 of common stock                                                                                          $   171,393

Note  receivable  related  parties,  collateralized  by  common  stock  (net  of
 $2,699,575 allowance and $650,425 imputed
 interest)                                                                                                 (1,650,000)

Services received
 in lieu of payments
 on notes receivable
 - related parties
 from issuance
 of common stock                                                                                              687,766

Compensation expense
 related to the issuance
 of stock options at
 below market value                                 $ 3,863,000

Deferred  compensation  related to the issuance of stock options at below market
 value to officers, directors, employees and consultants
 (net of cancellations)                               4,668,053                                                         $(4,668,053)

Amortization of deferred
 compensation on stock
 options                                                                                                                    909,959

Interest earned on notes
 receivable - related
 parties from issuance
 of or collateralized
 by common stock                                                                                             (264,855)

Compensation expense
 related to the issuance
 of stock for services
 at below market value                                  100,360

Net loss for the year
 ended September 30, 1996                                                                   $(13,836,320)
                             ---------      ------  -----------  -------   -----   -------- ------------  -----------   -----------
Balances at
 September 30, 1996          7,610,373      $7,610  $32,780,515  103,750   $ 104   $934,896 $(21,196,476) $(7,580,071)  $(5,179,942)

                                                 - Continued -

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

                                                       F-8

<PAGE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued

                                                                                                             Notes and
                                                                                                             interest
                                                                                                            receivable -    Deferred
                                                                  Common stock to be issued               related parties    compen-
                                                      Capital in                   Capital in   Accumu-  from issuance of,   sation
                                  Common Stock        excess of                    excess of    lated   or collateralized   on stock
                               Shares       Amount    par value   Shares   Amount  par value   deficit   by, common stock    options
                               ------       ------    ---------   ------   ------  ---------   -------   ----------------    -------
<S>                          <C>           <C>       <C>         <C>       <C>    <C>       <C>            <C>               <C>
Common stock issued for
 cash received in
 the prior period              103,750        $104   $  934,896 (103,750)  $(104) $ (934,896)

Common stock issued
 for cash, including
 exercise of stock
 options and warrants          603,281         603    2,773,414

Deferred compensation
 related to the issuance
 of stock options at
 below market value to
 officers, directors
 and employees                                        1,178,125                                                         $(1,178,125)

Common stock issued
 for services                   98,331          98      789,106

Expense to induce
 conversion of
 notes payable into
 common stock                                           323,000

Common stock issued to
 repay note payable
 - related parties              20,913          21      135,979

Common stock issued
 in conversion of
 note payable                  140,642         141    1,124,993

Common stock issued
 under a subscription
 agreement                      50,000          50      349,950

Common stock to be
 issued for cash
 received, including
 exercise of stock options                                       399,785     400  2,798,095

Common stock to be
 issued for distribution
 rights                                                           30,000      30    266,220

                                                 - Continued -

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

                                                       F-9

<PAGE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT), Continued


                                                                                                             Notes and
                                                                                                             interest
                                                                                                            receivable -    Deferred
                                                                  Common stock to be issued               related parties    compen-
                                                      Capital in                   Capital in   Accumu-  from issuance of,   sation
                                  Common Stock        excess of                    excess of    lated   or collateralized   on stock
                               Shares       Amount    par value   Shares   Amount  par value   deficit   by, common stock    options
                               ------       ------    ---------   ------   ------  ---------   -------   ----------------    -------
<S>                          <C>           <C>       <C>         <C>       <C>    <C>       <C>            <C>               <C>
Common stock to be
 issued under
 subscription
 agreements                                                       32,500    $ 32 $  227,468

Amortization of
 deferred compensation
 on stock options                                                                                                       $ 1,674,820

Interest expensed
 based upon issuance
 of convertible debt
 at a discount                                      $ 1,428,571

Cash received in
 payment on notes
 receivable -
 related parties
 from issuance of
 common stock                                                                                              $  108,793

Write down of notes
 receivable - related
 party                                                                                                         60,000

Net loss for year
 ended September 30, 1997                                                                   $(10,995,080)
                             ---------      ------  -----------  -------    ---- ---------- ------------  -----------   -----------
Balance at
 September 30, 1997          8,627,290      $8,627  $41,818,549  462,285    $462 $3,291,783 $(32,191,556) $(7,411,278)  $(4,683,247)
                             =========      ======  ===========  =======    ==== ========== ============  ===========   ===========
<CAPTION>
                                                      Capital in
                                  Preferred Stock     excess of
                                Shares       Amount   par value
                                ------       ------   ---------
<S>                            <C>            <C>    <C>
Balances at
 September 30, 1996               -           -            -

Preferred stock
 issued for cash, net          303,024        $303   $5,094,634
                               -------         ---    ---------
Balance at
 September 30, 1997            303,024        $303   $5,094,634
                               =======         ===    =========

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

                                                       F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                          Year ended           Year ended            Year ended
                                                         September 30,        September 30,         September 30,
                                                             1995                 1996                  1997
                                                       ----------------     ----------------      ----------------
Cash flows from operating activities:
<S>                                                        <C>                  <C>                  <C>
 Net loss                                                  $(5,653,551)         $(13,836,320)        $(10,995,080)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                            125,861               187,581              193,675
      Loss on disposal of discontinued subsidiaries            777,394               291,025                 -
      Write off of purchased technology and trade secrets      344,900                  -                    -
      Deferred income taxes                                    488,000                23,000                 -
      Common stock issued or to be issued for services         609,146               547,665            1,055,454
      Amortization of deferred compensation and
        compensation expense on stock options                  703,527             4,772,959            1,674,820
      Compensation expense on stock warrants                   104,000                  -                    -
      Notes payable issued for services                           -                  160,000                 -
      Interest earned on notes receivable - related parties,
        issued for or collateralized by common stock              -                 (264,855)                -
      Write-down of note receivable                               -                2,699,575               60,000
      Services received in lieu of payments on notes
        receivable issued for common stock                        -                  687,766                 -
      Interest expense based upon issuance of
        convertible debt at a discount                            -                     -               1,428,571
      Inducement expense related to conversion of
        notes payable into common stock                           -                     -                 323,000
      Loss on disposal of equipment                              3,359                  -                    -
      Loss on sale of facility                                    -                     -                 581,456
      Losses applicable to minority interests in subsidiaries     -                   (4,456)          (1,245,226)
     Increase  (decrease)  from changes in assets and  liabilities of continuing
       operations:
        Receivables                                            (15,934)              (55,739)              65,149
        Inventories                                             37,165              (162,757)             (61,234)
        Advances on inventories                                   -                     -              (1,086,964)
        Prepaid expenses and other current assets              (12,525)              (32,208)              (7,132)
        Deposits and other assets                              (36,298)               23,821             (120,973)
        Accounts payable                                       619,413             1,436,141           (1,138,131)
        Due to related party                                      -                     -               1,038,667
        Accrued liabilities                                    171,541                47,485              689,190
        Accrued interest payable, non-current                     -                     -                 204,402
        Accrued contractor liability                              -                     -               1,477,000
        Deferred revenues from advance license fees               -                     -               1,650,000
        Deferred compensation                                    9,943                10,711               11,279
        Discontinued operations non-cash charges and
          working capital changes                             1,487,036               893,893                 -
                                                           -----------          ------------         ------------
             Net cash used in operating activities            (237,023)           (2,574,713)          (4,202,077)
                                                           -----------          ------------         ------------
Cash flows from investing activities:
 Purchase of property, plant and equipment                    (693,609)           (5,055,732)          (7,194,049)
 Increase in cash surrender value of life insurance            (29,240)              (12,500)             (32,480)
 Issuance of notes receivable from related parties                -                 (703,733)                -
 Proceeds from notes receivable - related parties                 -                     -                  45,686
 Investing activities of discontinued operations              (485,361)                 -                    -
                                                           -----------          ------------         ------------
             Net cash used in investing activities          (1,208,210)           (5,771,965)          (7,180,843)
                                                           -----------          ------------         ------------

                                                   - Continued -

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

                                                       F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued


                                                          Year ended           Year ended            Year ended
                                                         September 30,        September 30,         September 30,
                                                             1995                 1996                  1997
                                                       ----------------     ----------------      ----------------
<S>                                                      <C>                  <C>                   <C>
Cash flows from financing activities:
 Payment on capital lease obligations                    $     (27,345)                 -                    -
 Proceeds from issuance of notes payable and
   convertible debentures                                         -           $      700,000        $   6,070,238
 Payment on notes payable                                      (19,530)             (159,413)          (1,109,066)
 Proceeds from issuance of notes payable
   - related parties                                            52,485                  -                 595,445
 Payment on notes payable - related parties                   (965,160)           (3,539,035)            (756,349)
 Proceeds from note receivable from issuance of
   common stock                                                   -                  171,393              108,793
 Proceeds from issuance of common stock                      2,224,200             7,570,260            5,749,966
 Fees paid in issuing common stock                                -                     -                (177,454)
 Proceeds from issuance of limited partnership
   interests in subsidiaries                                      -                4,385,000              302,500
 Allocation to limited partners                                   -                     -                (205,895)
 Proceeds from issuance of preferred stock                        -                     -               5,094,937
 Financing activities of discontinued operations             1,199,816            (1,582,587)                -
                                                         -------------        --------------        -------------

             Net cash provided by financing activities       2,464,466             7,545,618           15,673,115
                                                         -------------        --------------        -------------

Net increase (decrease) in cash                              1,019,233              (801,060)           4,290,195

Total cash and cash equivalents, beginning of period           271,933             1,291,166              490,106
                                                         -------------        --------------        -------------

Total cash and cash equivalents, end of period           $   1,291,166        $      490,106        $   4,780,301
                                                         =============        ==============        =============

Supplemental schedule of noncash investing and financing activities:
   Common stock issued for notes receivable              $     140,000        $    6,284,375        $     577,500
   Common stock issued to repay advances                       112,613                  -                    -
   Common stock issued for equipment                            10,304                  -                    -
   Common stock issued to repay notes payable                  100,000                  -               1,261,134
   Discontinued operations - capital lease of equipment        500,000                  -                    -
   Payable for briquetting equipment                              -                     -               1,967,686
   Obligations assumed in connection with sale of
     subsidiaries                                                 -                4,636,435                 -
   Note payable issued and common stock to be issued to
     acquire land                                                 -                  926,794                 -
   Note payable issued for inventory                              -                     -               1,595,000
   Note payable issued for equipment                              -                     -               1,607,422
   Note payable issued for services                               -                  160,000                 -
   Note receivable issued for sale of facility                    -                     -               3,500,000
   Note receivable received for subsidiaries (net of
     imputed interest)                                            -                4,349,575                 -
   Allocation to minority limited partners offset
     against note receivable                                      -                     -                  65,927

Supplemental disclosure of cash flow information: Cash paid for interest:
   Continuing operations                                 $     112,171        $      110,671         $    207,903
   Discontinued operations                                     217,001                98,358                 -

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

                                                       F-12
</TABLE>
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS


1.        Summary of Significant Accounting Policies:

          Business Organization

          Covol Technologies,  Inc. (the Company) was originally incorporated in
          Nevada in 1987 and  reincorporated  in  Delaware in August,  1995.  In
          August 1995, the Company changed its name to Covol Technologies,  Inc.
          from  Environmental  Technologies  Group  International.  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.
          The Company is currently  developing  and  marketing  the  Briquetting
          Technology.

          In June 1996, the Company formed Utah Synfuel #1, Ltd.  ("Utah Synfuel
          #1") and Alabama  Synfuel #1 ("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.

          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.  The
          Company's focus is currently on the construction of facilities and the
          licensing  of  their  Briquetting  Technology  to  companies  that are
          constructing  facilities  that will convert coal fines into  synthetic
          fuel  briquettes.  The  ability to achieve  profitable  operations  is
          contingent  upon the receipt of advance  licensing fees and ultimately
          upon the  successful  completion  of  construction  and  attainment of
          profitable  operation of the coal briquetting  facilities.  Profitable
          operation is contingent  upon the  facilities  qualifying  for federal
          income tax credits  under  Section 29 of the  Internal  Revenue  Code.
          Management  believes these  operational  issues will be  substantially
          resolved during 1998.

          Construction and Limestone Businesses

          On June 30, 1993, the Company acquired three  construction  companies.
          Industrial  Management  and  Engineering,  Inc.  (IME) is a management
          company for two construction  companies,  R1001, Inc., DBA State, Inc.
          (State) and Central Industries Construction, Inc. (CIC).

          On September 30, 1994, the Company acquired Larson Limestone  Company,
          Inc.  (Larson).  Larson owns and operates a limestone quarry and sells
          the  processed  quarry  products  primarily to  construction  projects
          located in Utah.

          On September  30, 1995,  the Company's  Board of Directors  approved a
          plan  to  discontinue   the  Company's   construction   and  limestone
          businesses.  The  construction  and  limestone  businesses  were sold,
          effective February 1, 1996. (See Note 15, "Discontinued Operations").

                                    Continued

                                      F-13

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


1.        Summary of Significant Accounting Policies, Continued:

          Principles  of Consolidation

          The  1995 and  1996  consolidated  financial  statements  include  the
          accounts of the Company and its 100% owned  subsidiaries,  IME, State,
          CIC and Larson,  until the time of their sale,  effective  February 1,
          1996. The 1996 and 1997 consolidated  financial statements 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.

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

          Effective  June 14, 1995,  the Company  implemented  a  one-for-twenty
          reverse  stock  split.   In  addition,   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 these  stock
          splits.

          Revenue and Cost Recognition

          Revenues from the sale of coal briquettes are recognized as product is
          shipped and  invoiced.  Revenues  from the  licensing of the Company's
          technology  is  recognized   when  earned  or  when  all   significant
          obligations have been met, which is normally when cash is received.

          For  the  discontinued  operations,   revenues  from  fixed-price  and
          modified  fixed-price  construction  contracts  are  recognized on the
          percentage-of-completion  method,  measured by the percentage of labor
          costs  incurred to date to  estimated  total labor costs (the  efforts
          expended  method)  for each  contract.  This  method  is used  because
          management  considers  expended  labor costs to be the best  available
          measure of progress on these  contracts.  Revenues from  cost-plus-fee
          contracts  are  recognized on the basis of costs  incurred  during the
          period plus the fee earned.

          Construction  costs  include all direct  material  and labor costs and
          those indirect costs related to contract performance, such as indirect
          labor, supplies, tools, repairs and depreciation. Selling, general and
          administrative  costs are charged to expense as  incurred.  Provisions
          for estimated  losses on uncompleted  contracts are made in the period
          in which such losses are determined.

                                    Continued

                                      F-14

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


1.        Summary of Significant Accounting Policies, Continued:

          Revenue and Cost Recognition, Continued

          Changes   in  job   performance,   job   conditions,   and   estimated
          profitability,   including   those  arising  from   contract   penalty
          provisions and final contract settlements,  may result in revisions to
          costs  and  income  and are  recognized  in the  period  in which  the
          revisions are determined.  Profit  incentives are included in revenues
          when their  realization  is  reasonably  assured.  An amount  equal to
          contract  costs  attributable  to claims is included in revenues  when
          realization is probable and the amount can be reliably estimated.

          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 two financial  institutions
          located in Utah.

          Inventories

          Inventories  are  stated at the lower of average  cost or market,  and
          consist of coal fines, available for sale.

          Property, Plant and Equipment

          Property, plant and equipment are recorded at cost and are depreciated
          using the  straight-line  method over their  estimated  useful  lives.
          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.

                                    Continued

                                      F-15

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


1.        Summary of Significant Accounting Policies, Continued:

          Property, Plant and Equipment

          Interest costs on projects under  development  are  capitalized to the
          extent required by generally accepted accounting standards. Amounts to
          be capitalized are determined by applying the Company's borrowing rate
          to the average accumulated expenditures for the project. The borrowing
          rate is determined by the Company,  based upon rates applicable to the
          actual  borrowings  outstanding  to the  Company  during the period of
          development.  During 1997 the Company incurred total interest costs of
          $2,022,854  (including  $1,428,571 of interest  based upon issuance of
          convertible debt at a discount), of which $377,659 was capitalized.

          Technology and Trade Secrets

          Prior to being written off in June 1995,  technology and trade secrets
          related to the coal briquetting  process,  which had been purchased in
          1991 and 1992 were recorded at cost and were being amortized using the
          straight-line  method over 17 to 20 years.  The  write-off in 1995 was
          based upon  development  of a new binder  system  which  replaced  the
          purchased technology and trade secrets.

          Loss Per Share Calculation

          Net loss per common share is computed on the weighted  average  number
          of common and common equivalent shares  outstanding during the period.
          Common stock equivalents consist of common stock options and warrants.
          Common  equivalent shares are excluded from the computation when their
          effect is anti-dilutive.

          At  September  30,  1997,  the  Company's  loss  per  common  share is
          determined after taking into account undeclared  cumulative  preferred
          dividends of $23,745 and $165,298 of preferred dividends imputed based
          upon  the  price  of  the  Company's  common  stock  at the  date  the
          convertible preferred shares were issued.

                                    Continued

                                      F-16

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


1.        Summary of Significant Accounting Policies, Continued:

          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  at the date of the financial  statements and the reported
          amounts of revenues and expenses during the reporting  period.  Actual
          results could differ from those estimates.

          Reclassifications

          Certain balances of the prior years have been  reclassified to conform
          with the current year's presentation.  These reclassifications have no
          effect on net income or total assets.

          Accounting for Contingencies

          The Company incurs liabilities in connection with litigation claims in
          the normal  course of business,  construction  contract  penalties and
          certain  indemnification  contingencies.  For example, the Company has
          entered into  construction  contracts that contain penalties if notice
          to  proceed  is  not  given  to the  contractor  by  specified  dates.
          Litigation claims and construction  contract penalties are recorded as
          a liability when it is determined that it is probable that a liability
          has been  incurred  or an asset has been  impaired  and the  amount is
          reasonably  estimable.  If the  amount  involved  covers a range,  the
          lowest  amount  in the  range  is  recorded  as a  liability  and  the
          remaining contingent liability amount is disclosed.

2.        Advances on Inventories:

          During  fiscal  1997,  the  Company  entered  into and  made  payments
          totalling  $1,086,964 under an agreement with Earthco to purchase coal
          fines.  The  total  amount  paid  has been  recorded  as  advances  on
          inventory at September 30, 1997.

          Under the  agreement,  the Company is obligated to pay Earthco a total
          of  $5,500,000  between  February  1997 and May 2000 for  rights  to 2
          million  tons of coal  fines (a price of $2.75 per ton).  The  Company
          also has the right to purchase another 500,000 tons, if available,  at
          $2.75 per ton. No payment is  required  for any tons used in excess of
          2.5 million.

                                    Continued

                                      F-17

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


3.        Notes Receivable - Related Parties:

          Notes receivable - related parties consists of the following:

                                                                                 September 30,       September 30,
                                                                                     1996                1997
                                                                                 -------------       -------------

         <S>                                                                     <C>                 <C>
          Note receivable from Coaltech (a limited  partnership,  of which Covol
          is a 1% general  partner),  bearing  interest at 9.7%,  principal  and
          interest  payments of $130,000  due each quarter  beginning  March 31,
          1997 and ending December 31, 2007, collateralized by equipment used as
          part of the Utah Synfuels #1 facility.  As of September 30, 1997,  one
          payment of $130,000 had been received.                                      -                $3,419,995

          Notes receivable from seven officers of the Company,  bearing interest
          at prime (8.5% at September 30, 1997) plus 2%,  principal and interest
          due on August  1,  2000,  collateralized  by a 8.1%  interest  in Utah
          Synfuels #1 and a 0.6% interest in Alabama Synfuel #1. (No interest
          revenue was recognized for fiscal 1996 or 1997).                        $700,000                672,125

          Other notes receivable                                                     3,733                   -
                                                                                  --------             ----------

                                                                                   703,733              4,092,120

             Less:  current portion                                                 (3,733)              (275,516)
                                                                                  --------             ----------

             Total non-current                                                    $700,000             $3,816,604)
                                                                                   =======             ==========
</TABLE>

                                    Continued

                                      F-18

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


4.        Property, Plant and Equipment:

          Property, plant and equipment consists of the following:

                                                      Range of
                                                      estimated               September 30,          September 30,
                                                    useful lives                  1996                    1997
                                                    ------------              -------------          ------------

         <S>                                         <C>                      <C>                    <C>
          Buildings                                   10 - 20 years            $   338,234            $ 1,083,649
          Machinery and equipment                      5 - 10 years              1,805,091              2,102,228
          Construction in progress                                               5,384,733             11,029,892
          Accumulated depreciation                                                (402,813)              (596,498)
                                                                                ----------            -----------
          Net property, plant and
             equipment                                                          $7,125,245            $13,619,271
                                                                                ==========            ===========


5.        Due To Related Party:

          Due to related party consists of the following:
<CAPTION>

                                                                              September 30,          September 30,
                                                                                  1996                   1997
                                                                              -------------          -------------

         <S>                                                                  <C>                    <C>
          Receivables from Coaltech related to
          sale of binder and interest on note
          receivable.                                                                 -               $   509,007

          Payable to Coaltech relating to the
          purchase of synthetic fuel briquettes.                                      -                (1,547,674)
                                                                               -----------             ----------

             Total due to related party                                        $         0            $(1,038,667)
                                                                               ===========             ==========
</TABLE>

                                    Continued

                                      F-19

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


6.        Notes Payable and Convertible Debentures:

          Notes payable and convertible debentures consists of the following:

                                                                                September 30,          September 30,
                                                                                    1996                   1997
                                                                                -------------          -------------
          <S>                                                                    <C>                   <C>
          Note payable to a bank,  bearing  interest at prime plus 2%, principal
          and   interest   of  $3,711  due   monthly   through   October   2001,
          collateralized  by an office  building,  property and  equipment,  and
          three former officers of IME, remaining balance paid in August 1997.     $179,249                  -

          Note payable to a bank,  bearing  interest at prime plus 2%, principal
          and interest  originally  due January 29, 1997 and extended to May 30,
          1997, personally guaranteed by seven officers and former officers of
          Covol, remaining balance paid in August 1997.                             700,000                  -

          Note payable to a corporation, non-interest bearing (interest  imputed
          at 10.25%), due on demand, paid in November 1996.                         229,817                  -

          Note  payable to a  corporation  bearing  interest  at prime  (8.5% at
          September 30, 1997) plus 2%. Collateralized by plant and equipment.
          Principal and interest due December 20, 1999.                                -               $2,900,000
</TABLE>
                                    Continued

                                      F-20

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


6.        Notes Payable and Convertible Debentures, Continued:

                                                                                 September 30,       September 30,
                                                                                     1996                1997
                                                                                     ----                ----
          <S>                                                                    <C>                 <C>
          Note  payable to a  corporation  bearing  interest  at prime  (8.5% at
          September  30, 1997) plus 2%.  Principal and interest due upon demand.      -                 $ 945,104

          Convertible  Note payable to a corporation,  bearing interest at prime
          (8.50% at  September  30,  1997) plus 2%,  allows  borrowing  of up to
          $5,000,000  at the  Company's  option.  Principal  and interest due 
          August 1998.  Collateralized  by plant,  equipment  and coal
          fines. The entire $5,000,000 is convertible upon funding at the option
          of the lender at $7.00 per share.                                           -                  3,302,422

          Convertible  debenture  to two  individuals  and  one  trust,  bearing
          interest at prime (8.5% at September 30, 1997) plus 2%.  Principal and
          interest due June 30, 1998. Convertible at $11.00 per share.                -                 1,000,000
                                                                                ----------             ----------

                                                                                 1,109,066              8,147,526

             Less: current portion                                                (958,086)            (5,247,526)
                                                                                ----------              ---------

             Total non-current                                                  $  150,980             $2,900,000
                                                                                ==========             ==========
</TABLE>

          Subsequent to year-end,  the Company re-negotiated its $2,900,000 and
          $945,104  notes payable shown above,  decreasing  the interest rate to
          6%. In addition,  the Company  granted  warrants in an amount equal to
          10% of the amount financed estimated to be 400,000 warrants based upon
          $4,000,000 in expected  total  financing.  Half of these warrants will
          have a strike  price of $10 and half will have a strike  price of $20.
          Subsequent to year-end, the Company re-negotiated it's $3,202,422 Note
          payable shown above,  increasing the amount  available under this Note
          from  $5,000,000  to $7,000,000. The Note contains certain covenants, 
          including restrictions on loans, advances on investments outside the 
          normal course of business.


          Future  maturities of notes payable and convertible  debentures are as
follows:

          Year ending September 30,


                                   1998                    $5,247,526
                                   1999                             0
                                   2000                     2,900,000
                                                           ----------
                                   Total                   $8,147,526
                                                           ==========

                                    Continued

                                      F-21

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


7.        Notes Payable - Related Parties:

          Note payable - related parties consists of the following:
                                                                                 September 30,      September 30,
                                                                                     1996               1997
                                                                                     ----               ----
          <S>                                                                     <C>               <C>
          Note  payable  to a  shareholder,  non-interest  bearing,  $4,000  due
          monthly  with all  remaining  principal  and  interest due in January,
          1997, paid in March 1997 through issuance of common stock.              $136,000                -

          Obligations to two  former  officers  and  shareholders,  non-interest
          bearing, payable upon demand, paid in September 1997.                    650,000                -

          Note payable to two officers of Covol bearing  interest at prime (8.5%
          at  September  30,  1997) plus 2%.  Principal  and  interest due on or
          before November 26, 2002.                                                   -              $ 489,096
                                                                                  --------           ---------
                                                                                   786,000             489,096
             Less:  current portion                                                786,000                   0
                                                                                  --------            --------
          Total notes payable - related parties,
             non-current                                                          $      0           $ 489,096
                                                                                  ========           =========
</TABLE>

          Future maturities of notes payable - related parties are as follows:

          Year ending September 30,

                                   1998                             -
                                   1999                             -
                                   2000                             -
                                   2001                             -
                                   2002                       $  489,096
                                                              ----------
                                  Total                       $  489,096
                                                              ==========

                                    Continued

                                      F-22

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


8.        Deferred Compensation Agreement:

          Upon the acquisition of two  subsidiaries in 1993, the Company assumed
          a  liability  to pay  $40,000  per  year  for  seven  years  beginning
          February,  1999 to a current  stockholder of the Company.  The present
          value of this liability, discounted at 5.18%, is reflected as deferred
          compensation on the consolidated balance sheet.

9.        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
          filed a consolidated tax return with its 100% owned subsidiaries (IME,
          State,  CIC and Larson)  through the time of their sale on February 1,
          1996.  Both  majority  owned  limited  partnerships  file separate tax
          returns, as required.

          As  of  September  30,  1997,  the  Company  has  net  operating  loss
          carryforwards of approximately $16,842,000 which can be used to offset
          future taxable  income.  The net operating loss  carryforwards  expire
          from 2005 to 2011.  The  Company  also has  approximately  $189,000 in
          research and development tax credit carryforwards which can be used to
          offset  future tax  liabilities.  The tax credits  expire from 2007 to
          2011.

          The provision for income taxes for the years ended  September 30, 1996
          and 1997 differs from the statutory federal income tax rate due to the
          following:
<TABLE>
<CAPTION>

                                                         September 30,         September 30,         September 30,
                                                             1995                  1996                  1997
                                                         ------------          -------------         ------------

          <S>                                            <C>                   <C>                   <C>
          Tax benefit at statutory rates                  $ 1,372,000           $ 3,810,000           $ 3,738,000
          Change in valuation allowance                    (1,971,000)           (4,007,000)           (3,840,000)
          State income taxes, net of
             federal tax effect                               133,000               363,000               101,000
          Redetermination of prior
             years tax estimates                              (22,000)             (189,000)                1,000
                                                          -----------           -----------            ----------

          Tax provision                                   $  (488,000)          $   (23,000)          $         0
                                                          ===========           ===========           ===========
</TABLE>

                                    Continued

                                      F-23

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


9.        Income Taxes, Continued

          The types of temporary differences between the tax bases of assets and
          liabilities  and their financial  reporting  amounts that give rise to
          the net deferred tax assets and  liabilities  relate  primarily to net
          operating losses and expenses  related to compensatory  stock options.
          Other differences include the use of accelerated  depreciation for tax
          purposes and  straight-line  depreciation  for book purposes,  and the
          recording of certain reserves for book purposes. The components of the
          net  deferred  tax  asset  as of  September  30,  1996 and 1997 are as
          follows:
                                                                                 1996                   1997
                                                                          ----------------        ---------------
             Deferred tax assets (liabilities):
              <S>                                                             <C>                    <C>
               Net operating loss carryforwards                                $ 5,830,000            $ 6,282,000
               Research and development tax credit
                 carryforwards                                                     141,000                189,000
               Amortization of trade and technology                                 72,000                 43,000
               Write-off of license                                                   -                   104,000
               Write-down of note receivable                                          -                   712,000
               Compensation expense due to common stock options                       -                 2,003,000
               Reserve for contractor's liability                                     -                   551,000
               Depreciation                                                        (65,000)              (111,000)
               Other                                                                  -                    45,000
                                                                               -----------            -----------
               Total deferred tax assets                                         5,978,000              9,818,000
               Valuation allowance                                              (5,978,000)            (9,818,000)
                                                                               -----------            -----------
               Net deferred tax asset                                          $         0            $         0
                                                                               ===========            ===========
</TABLE>

          The valuation  allowance  changed by $3,840,000  during the year ended
          September 30, 1997,  representing the amount of deferred tax assets at
          September 30, 1997 not considered  recoverable through the reversal of
          taxable  temporary  differences,  or the  generation of future taxable
          income.  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 $9,818,000  should be provided
          as of September 30, 1997. This estimate may change in the near term.

                                    Continued

                                      F-24

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


10.       Leases:

          Rental expense was $92,850,  $330,006 and $317,817 for the years ended
          September  30,  1995,  1996 and  1997,  respectively.  Rental  expense
          charged to discontinued operations was $429,472 for the year ended
          September 30, 1995.

          The Company has a noncancellable operating lease for equipment through
          the year 2000 and other  operating  leases for real estate  which both
          expire prior to the year ended 2006.  At September  30, 1997,  minimum
          rental payments due under these leases, are as follows:

             Year Ending September 30,

                              1998                   $202,194
                              1999                    199,740
                              2000                     87,425
                              2001                      7,500
                              2002                      7,500
                                                     --------

                   Total minimum payments due        $504,059
                                                     ========

                                    Continued

                                      F-25

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


11.       Notes and Interest  Receivable - Related  Parties,  Collateralized  by
          Common Stock:
                                                                                  September 30,      September 30,
                                                                                      1996               1997
                                                                                  -------------      -------------
          <S>                                                                    <C>                <C>
          Note receivable from two shareholders,  $5,000,000 face amount bearing
          interest at 6% renegotiated  in November 1997,  principal and interest
          of $514,814 due in annual payments beginning January 31, 1999, through
          January 31,  2004,  with  remaining  balance  due  January  31,  2005,
          collateralized by 130,000 shares of the Company's common stock held by
          the Company, 50,000 options to acquire shares of the Company's common
          stock committed by the shareholders to be provided to the Company, and
          personal  guarantees of two shareholders (net of unamortized  discount
          after  renegotiation of $1,280,745  based upon imputed rate of 10.25%,
          and  allowance for  impairment of $2,129,255  including the effects of
          renegotiation  and due to change in stock  and  stock  options  of the
          Company held as collateral. Notes are  shown at  collateralized  value
          and no interest income was recognized during 1997.                       $1,650,000           $1,590,000

          Notes and interest  receivable  from 11 current and former  employees,
          issued in exercise of 450,000 common stock options at $5.31 per share,
          bearing interest at 5.7%, principal and interest due in December 2000,
          collateralized  by 450,000  shares of common stock of the Company.  No
          interest income was recognized during 1997 related to these Notes         2,191,157            2,191,157

                                    Continued

                                      F-26

<PAGE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


11.       Notes and  Interest Receivable - Related  Parties,  Collateralized  by
          Common Stock, Continued:

                                                                                  September 30,      September 30,
                                                                                      1996               1997
                                                                                  -------------      -------------
          <S>                                                                    <C>                <C>
          Notes and interest  receivable  from 16 current and former  employees,
          issued in  exercise  of  450,000  common  stock  options at $8.375 per
          share,  bearing  interest  at  5.7%,  principal  and  interest  due in
          December 2000, collateralized by 450,000 shares of common stock of the
          Company.  No  interest  income  was  recognized during 1997 related to
          these Notes.                                                             $3,613,914           $3,613,914

          Other Notes receivable, collateralized by common stock of the Company.      125,000               16,207
                                                                                   ----------           ----------

          Total                                                                    $7,580,071           $7,411,278
                                                                                   ==========           ==========
</TABLE>
12.       Issuances of Preferred and Common Stock

          Significant issues of common and preferred stock are detailed below:

          Common Stock

          In  May  1997  and  July  1997,  the  Company  completed  two  private
          placements  of  224,000  and  60,000  units  respectively.  Each  unit
          consists  of one share of common  stock and one  warrant to purchase a
          share of common stock at $7.25 per share. The warrants are exercisable
          at any time up to the  second  anniversary  of their  issuance.  As of
          September  30,  1997,  all 284,000  shares  relating to these  private
          placements had been issued.

                                    Continued

                                      F-27

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


12.       Issuances of Preferred and Common Stock, Continued:

          Common Stock, Continued

          On August 28, 1997, the Company issued a private  offering  memorandum
          for the placement of up to 100,000  units of common  stock.  Each unit
          consists of five  shares of common  stock and a warrant to purchase an
          additional share of common stock at $8 per share.  These warrants must
          be  exercised  by April 30, 1998.  As of  September  30, 1997,  50,000
          shares had been issued and 32,500  shares  remained to be issued under
          subscription agreements totalling $577,500,  shown as receivable-stock
          subscriptions  for which cash was received after year end. The Company
          had also received  $2,798,495 in cash under common stock subscriptions
          for 399,785 shares which were included in common stock to be issued.

          Preferred Series A - Non-Voting

          During  August  1997,  Covol   Technologies  filed  a  Certificate  of
          Designation  to establish a new non-voting  class of preferred  stock,
          "Series A 6%  Preferred"  with a par value of $.001 per  share.  As of
          September  30,  1997,  3,000 shares of Series A shares were issued and
          outstanding  for  $3,000,000.  The Series A preferred  shares 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 the  corporation has any profits.  However,  additional
             shares of Series A Preferred stock may be issued in lieu of cash to
             pay the 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  contains  a warrant to  purchase
             28.571  or a total of 85,713  shares of common  stock at a price of
             $8.00 per share. These warrants expire on August 31, 1999.

                                    Continued

                                      F-28

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


12.       Issuances of 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  conversion  price is the number of
             preferred  shares to be converted  multiplied by $1,000 and divided
             by the conversion price (i.e.,  $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.

          No dividends have been declared through September 30, 1997. Cumulative
          Series A preferred  dividends in arrears at September 30, 1997 totaled
          $20,712 or $20.71 per share of Series A preferred stock.

          Preferred Series B - Non-Voting

          During  September 1997, the Company filed a Certificate of Designation
          and  subsequently  a Certificate of Correction to amend their Articles
          of  Incorporation  to allow  for the  issuance  of  312,882  shares of
          non-voting  preferred  stock to be designated as "Series B Convertible
          Preferred  shares".  The par  value of this  stock is to be $.001  per
          share.  As of September  30, 1997,  300,024  shares of Series B shares
          were issued and outstanding based upon a private offering to investors
          at an offering  price of $7 per share.  The Series B preferred  shares
          have the following rights and privileges:

          1. The holders of the shares are entitled to  cumulative  dividends at
             the  rate of  7.29%  per  year of the  liquidation  value of $7 per
             share. On March 18, 1998, the dividend  accrual  percentage will be
             modified  to equal  the rate for the  two-year  treasury  bond plus
             1.5%. These dividends accrue whether or not they have been declared
             or  whether  the  Company  has any  profits.  Shares  of  Series  B
             Preferred  stock may be  issued in lieu of cash to pay the  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.

                                    Continued

                                      F-29

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


12.       Issuances of Preferred and Common Stock, Continued:

          Preferred Series B - Non-Voting, Continued

          3. Each unit (3  shares) of Series B  Preferred  contains a warrant to
             purchase  one share of common  stock at a price of $8.00 per share,
             which may be exercised at any time by the holder of the warrant.

          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) at the price of $7.00.  Accrued  dividends
             may be  converted by the Company at the  conversion  price of $7.00
             per share.

          No cash dividends have been declared through September 30, 1997. Based
          upon the conversion price per share at the date of issuance a non-cash
          dividend of $165,298 was imputed upon issuance.  Cumulative  preferred
          dividends in arrears at September 30, 1997 totaled $3,033 or $0.02 per
          share.

13.       Stock Options and Warrants:

          At September  30, 1997,  the Company had one stock based  compensation
          plan  and  has  issued  non-qualified  options  which  have  not  been
          exercised,  which are  described  below.  The  Company  has elected to
          continue to apply APB Opinion  No. 25 to options  issued to  employees
          and directors,  as allowed by SFAS Statement No. 123. Had compensation
          expense  for  the  Company's   stock-based   compensation  plans  been
          determined  based  upon the fair  value at the  grant  date for  these
          awards,  as outlined in FAS 123, the  Company's  net loss and loss per
          share would have changed to the pro forma amounts below:

                                                     1996              1997
                                                ------------      ------------

          Net loss            As reported       $(13,836,320)     $(10,995,080)
                                                ============      ============
                              Pro forma         $(14,530,000)     $(11,610,000)
                                                ============      ============

          Loss per share      As reported       $      (1.99)     $      (1.38)
                                                ============      ============
                              Pro forma         $      (2.09)     $      (1.46)
                                                ============      ============

                                    Continued

                                      F-30

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          The fair value of each option grant is estimated as of the date of the
          grant, using the Black-Scholes option pricing model with the following
          weighted  average  assumptions  used for  grants  in the  years  ended
          September 30, 1995, 1996 and 1997,  respectively:  expected volatility
          of 70%, expected lives of 10 years and zero dividend yield assumed.

                                       1997                        1996                        1995
                                     Weighted                    Weighted                    Weighted
                                      Average                     Average                     Average
                                     Exercise                    Exercise                    Exercise
                                      Options        Price        Options        Price        Options       Price
                                      -------        -----        -------        -----        -------       -----
         <S>                        <C>              <C>       <C>            <C>           <C>            <C>
          Outstanding at begin-
          ning of the year            1,366,500        $1.62     2,030,000      $  2.37       296,300        $1.10
          Granted                       445,000         6.08     1,611,500         3.51     1,930,000         2.43
          Exercised                     (73,000)        1.84    (1,085,000)        5.92      (196,300)        1.08
          Forfeited                    (125,000)        1.50    (1,190,000)        1.54             0         0.00
                                      ---------         ----    ----------      -------     ---------         ----

          Outstanding at
          end of the year             1,613,500        $2.85     1,366,500      $  1.62     2,030,000        $2.37

          Weighted average fair
          value of options granted
          during the year below
          market                                       $9.53                    $ 12.66                      $2.76

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

          Assumed risk free rates                       7.80%              5.71% - 6.98%                6.40% - 7.09%
</TABLE>
                                    Continued

                                      F-31

<PAGE>
<TABLE>
<CAPTION>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          The  following  table  summarizes   information  about  stock  options
          outstanding at September 30, 1997:

                                                  Weighted
                                 Options           Average          Weighted          Exercisable       Weighted
                             Outstanding at       Remaining          Average          Options at         Average
                              September 30,         Life            Exercise         September 30,      Exercise
                Price             1997           (in years)           Price              1997             Price
          ----------------   ---------------   --------------   ----------------   ---------------   ----------
          <S>                  <C>                     <C>         <C>                 <C>              <C>
          $1.50 to $3.50         1,311,000               9           $  1.60             673,761          $1.70
          $8.00 to $9.00           302,500              10              8.24              38,308           8.12
                                ----------                                               -------
                                 1,613,500               9              2.85             712,069           2.04
                                 =========                                               =======
</TABLE>
          1995 Stock Option Plan

          Under the Company's 1995 Stock Option Plan (the "Option Plan"),  which
          was  adopted in June of 1995 and  amended in January  1996,  2,400,000
          shares of common stock are reserved for issuance  upon the exercise of
          stock  options.  The Option Plan is designed to serve as an  incentive
          for  retaining  qualified  and  competent  employees,   directors  and
          consultants.

          A committee of the Company's  Board of  Directors,  or in its absence,
          the Board (the "Committee") administers and interprets the Option Plan
          and is authorized to grant options and other awards  thereunder to all
          eligible  employees of the Company,  including  officers and directors
          (whether or not  employees)  of the Company.  The Option Plan provides
          for the  granting of both  "incentive  stock  options"  (as defined in
          Section 422 of the  Internal  Revenue  Code) and  non-statutory  stock
          options.  Options  can be granted  under the Option Plan on such terms
          and at such prices as determined by the Committee,  except for the per
          share exercise price of incentive stock options which will not be less
          than the fair  market  value of the common  stock on the date of grant
          and,  in the  case  of an  incentive  stock  option  granted  to a 10%
          stockholder,  the per share  exercise price will not be less than 110%
          of such fair market  value.  The  aggregate  fair market  value of the
          shares of common stock  covered by  incentive  stock  options  granted
          under the Option  Plan that  become  exercisable  by a grantee for the
          first time in any calendar year is subject to a $100,000 limit.

                                    Continued

                                      F-32

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          1995 Stock Option Plan, Continued

          Options  granted under the Option Plan will be  exercisable  after the
          period or periods specified in the option  agreement.  Options granted
          under the Option Plan are not exercisable  after the expiration of ten
          years  from the date of grant and are not  transferable  other than by
          will or by the laws of descent and distribution.

          During 1995,  450,000  options were issued under the Option Plan. Such
          options are exercisable  through September,  2005 at a price of $5.31.
          These options were exercised for notes receivable in November 1995.

          In October 1995, the Company  issued 450,000  options under the Option
          Plan. Such options are exercisable  through November,  2005 at a price
          of  $8.38.  These  options  were  exercised  for notes  receivable  in
          November 1995.

          During 1997, the Company issued 280,000  options under the option plan
          at a price of $8.25 and are  exercisable  through 2007.  These options
          remain unexercised at September 30, 1997.

          Non-Qualified Options

          Options are granted at the discretion of the Board of Directors.

          In 1993 the  Company  issued  options to  purchase  470,000  shares of
          common  stock  at  $0.80 to  $2.50  per  share  to seven  individuals,
          including  certain  officers and  directors.  Effective  September 30,
          1994,  223,700 of these options had been exercised or expired.  During
          1995, 176,300 were exercised and 25,000 expired unexercised.  Also, in
          May 1995,  the Company  reissued  stock options to purchase  75,000 at
          $1.00 to an officer  for  options  that had  previously  expired.  The
          remaining  120,000  options  were  exercised  during  the  year  ended
          September 30, 1996.

                                    Continued

                                      F-33

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          Non-Qualified Options, Continued

          During 1993,  options to purchase  100,000 shares of common stock were
          issued to a marketing firm at $1.00 per share. In 1994,  these options
          were exercised in exchange for a note receivable. The note receivable,
          which is  non-interest  bearing and had no fixed  repayment  term,  is
          reflected as a reduction to stockholders' equity in 1995. During 1996,
          the Note was repaid in services to the Company.

          On  December  1, 1994,  the  Company  granted  options  to  purchase a
          combined total of 50,000 shares of common stock to two persons, each a
          consultant  to the  Company.  Such  options  are  exercisable  through
          December  1,  1996 at a price of $1.80 per  share.  During  1997,  all
          50,000 options were exercised.

          In 1994,  the Company  granted  options to purchase  30,000  shares of
          common stock to an officer of the Company.  Options for 20,000  shares
          of common stock were  exercised in February  1995, at a price of $1.80
          per share and the remaining 10,000 options expired  unexercised during
          1996.

          On January 1, 1995, the Company granted options to purchase  1,280,000
          shares of common stock to certain  executive  officers,  employees and
          directors of the Company.  During the years ended  September  30, 1996
          and  1997,   35,000  and  10,000  of  these  options  were  exercised,
          respectively,  and  722,500  and 65,000 were  forfeited  or  canceled,
          respectively.  The remaining 447,500 shares remain exercisable through
          December  31,  2004 at a price of $1.50 per share.  At  September  30,
          1997, 50,000 of these options are held by the Company as collateral on
          a note receivable.

          On January 25, 1995, the Company granted  options to purchase  100,000
          shares of  common  stock to an  officer  of the  Company,  exercisable
          through January 25, 1997 at a price of $1.80 per share.  These options
          were canceled in 1996.

          On May 1, 1995, the Company  granted options to purchase 20,000 shares
          of common stock to an individual  who was a consultant to the Company.
          Such options were exercisable  through December 31, 1996 at a price of
          $2.50 per share. Of these options,  10,000 were exercised  during 1996
          and 10,000 were canceled.

                                    Continued

                                      F-34

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          Non-Qualified Options, Continued

          On January 1, 1996, the Company  granted  options to purchase  160,000
          shares  of  common  stock  at a price of $1.50  per  share to  certain
          officers,  employees and  consultants.  Of these  options,  20,000 and
          3,000 were  exercised and 35,000 and 0 were  canceled  during 1996 and
          1997,  respectively.  At September  30,  1997,  102,000 of the options
          remain unexercised.  On this same date, the Company granted options to
          purchase  124,000  shares of  common  stock at  prices  between  $2.50
          and$3.50 per share to certain  consultants.  Of these options,  10,000
          were exercised during 1997 and 114,000 remain unexercised at September
          30, 1997.

          On June 3, 1996,  the  Company  granted  options to  purchase  100,000
          shares of common  stock  for  $1.50  per  share to an  officer  of the
          Company as part of compensation related to an employment agreement. At
          September 30, 1997, all 100,000 options remain unexercised.

          On August 13, 1996, the Company  granted  777,500  options to purchase
          shares of common stock to certain  employees,  officers and  directors
          for $1.50 per share. During 1996 and 1997, 312,500 and 50,000 of these
          options were canceled,  respectively.  At September 30, 1997,  415,000
          shares remain unexercised.

          During fiscal 1997,  the Company  issued  options to purchase  165,000
          shares of common stock to 13 employees, officers or directors at $1.50
          to $9.00 per share. As of September 30, 1997,  10,000 of these options
          had been forfeited and 155,000 options remain unexercised.

          Recipients  of these  options may  exercise  them at any time.  Shares
          related to exercised options are held in escrow and are made available
          as the options  vest.  The options vest at different  times based upon
          the terms  offered with some options  vesting  immediately  and others
          over terms of up to 10 years.  In the event that an executive  officer
          or employee  terminates  employment  with the  Company,  or a director
          ceases to be a director,  prior to the specified  vesting period,  the
          Company will cancel any of the shares in which the  recipient  has not
          vested according to the terms of the option.

                                    Continued

                                      F-35

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


13.       Stock Options and Warrants, Continued:

          Compensation From Stock Options

          When  options  are issued  with  terms  considered  compensatory,  the
          compensation  expense  related to these options is being  amortized to
          expense  over the  specified  vesting  period.  Deferred  compensation
          related to options  issued in 1995,  1996 and 1997 that vest over time
          was $1,888,750, $4,668,053 and $1,178,125, respectively. The amortized
          compensation  expense  related to these options is $466,902,  $909,959
          and $1,572,320  for 1995,  1996 and 1997,  respectively.  Compensation
          expense  related  to  options  that  vest  immediately  was  $236,625,
          $3,863,000 and $102,500 for 1995, 1996 and 1997, respectively.

          Warrants

          In January 1995, the Company issued warrants to purchase 65,000 shares
          of common stock to RAS Securities  Corp. Such warrants are exercisable
          through  January  1999  at an  exercise  price  of  $1.50  per  share.
          Consulting fees of $84,500,  related to these warrants, was recognized
          in the year ended  September  30, 1995.  During 1996,  53,000 of these
          warrants were exercised and 12,000 were exercised in 1997.

          In February  1996,  the Company  issued  warrants to purchase  164,967
          shares of common stock at prices ranging from $25 to $35. In addition,
          warrants to purchase  43,750  shares of common  stock at $15 per share
          were issued in July 1996. In both cases,  the issuance of warrants was
          made  in  connection  with  private  placement  of  common  stock.  At
          September 30, 1997, these warrants remain unexercised.

          During 1997, the Company issued  682,495  warrants to purchase  common
          stock at prices  ranging  between $7 and $30 per share to investors in
          connection  with private  placements of common stock.  These  warrants
          expire between December 1998 and April 1999 and remain  unexercised at
          September 30, 1997.

          In August and September  1997, the Company issued 571,403  warrants to
          purchase  common  stock at $8 per  share to  investors  and  financial
          advisors  in  connection  with the  issuance of  preferred  and common
          stock.  These warrants  expire in June,  August and September 1999 and
          remain unexercised at September 30, 1997.

                                    Continued

                                      F-36

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


14.       Patents:

          The Company has received four current  United  States  patents and has
          one United States  patent  application  pending and two  international
          patent  application   pending  under  the  Patent  Cooperation  Treaty
          covering  certain  aspects of the  Briquetting  Technology.  There are
          other  industrial  waste recycling  technologies in use and others may
          subsequently  be developed,  which do (or will) not utilize  processes
          covered by the patents or pending patents.

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  and  limestone  subsidiaries.  In
          September  1995, the Board of Directors  approved a plan to dispose of
          the Company's construction and limestone businesses.  Accordingly,  on
          February 1, 1996, the Company entered into a Stock Purchase  Agreement
          (the Agreement) with former  principals of IME, State,  CIC and Larson
          (Buyers) to sell all of the common shares of the  subsidiaries  to the
          Buyers for a $5,000,000 face value  promissory note (the Note). One of
          the Buyers is the son of a former  director of the Company.  The terms
          of the original  agreement  were  clarified  in November  1997 and any
          effect is included in the change in the  allowance  to reduce the Note
          to collateral value (discussed  below).  The Note is collateralized by
          130,000  shares of the  Company's  common stock and 50,000  options to
          purchase common stock at $1.50 per share,  personal  guarantees of the
          Buyers, and is payable together with interest at 6% per year (interest
          imputed  at 10.25%)  as  follows:  interest  has been  waived  through
          January 31, 1998,  principal  and  interest is then  payable  annually
          January 31, 1999 through  January 31, 2004;  and all unpaid  principal
          and interest is payable January 31, 2005.  Because the Note includes a
          favorable interest rate for the Buyers, 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% is to reduce
          the Note to $3,719,255 as of the date of the  renegotiated  Agreement.
          The original  discount on the Note was included in the estimated  loss
          on disposal of discontinued operations in 1996.

                                    Continued

                                      F-37

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


15.       Discontinued Operations, Continued:

          Because the Note is  collateralized by the Company's common stock, the
          Note  is  reflected  in the  consolidated  financial  statements  as a
          reduction to stockholders' equity (deficit). 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.
          Because of a decrease in the  trading  price of the  Company's  common
          stock  subsequent  to  the  date  of  the  Agreement,   allowances  of
          $2,129,255 and $2,699,575 are reflected in the Company's  consolidated
          financial statements as of September 30, 1997 and 1996,  respectively.
          Subsequent changes in the value of the collateral will be reflected in
          the  consolidated  statement  of  operations  and  as an  increase  or
          decrease to the Note.

          Under  the  terms of the  Agreement,  the  Company  agreed  to pay off
          $3,500,000 of accounts payable and lines of credit  outstanding in the
          subsidiaries.  Subsequently,  the Buyers 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  Buyers.  The  Company  has  reflected  those
          obligations in the additional loss on the discontinued  operations for
          the year ended September 30, 1996.

          The results for the  construction  and limestone  operations have been
          classified as discontinued operations for all periods presented in the
          Consolidated  Statements of Operations  for 1995 and 1996.  The assets
          and liabilities of the discontinued operations have been classified in
          the  Consolidated   Balance  Sheets  as  "Net  assets  -  discontinued
          operations".  Discontinued  operations  have also been  segregated for
          1995 and 1996 in the Consolidated Statements of Cash Flows.

          Revenues  of  the   discontinued   operations  were   $14,681,032  and
          $1,396,641  for the year ended  September 30, 1995 and the four months
          ending February 1, 1996 (the date of sale), respectively.

                                    Continued

                                      F-38

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


16.       Fair Value of Financial Instruments:

          Statement of Financial  Accounting  Standards  (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 
             * 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

          For each of the financial instruments listed above, the carrying value
          approximates  fair value of the  instruments  and each is reflected in
          the financial statements at fair market value.

17.       Commitments and Contingency:

          During 1995 and 1996, the Company or its licensee  entered into thirty
          contracts for the construction of manufacturing  facilities that would
          use the Company's proprietary Briquetting Technology in the conversion
          of coal fines into synthetic fuel. All of these construction contracts
          contain  penalties if the contracting  party fails to proceed with the
          construction of these facilities.

          Fifteen  of  these   construction   contracts  were  entered  into  by
          independent third parties and Covol Technologies was not a party. Four
          contracts  were entered  into  jointly by Covol and its joint  venture
          partners.  The remaining eleven are Covol contracts.  Accordingly,  no
          liability for failing to proceed exists with these  contracts.  Of the
          contracts for which Covol has liability or shared  liability there are
          two joint venture  facilities  that will not be constructed  and there
          are four contracts where the Company  believes it is probable that the
          facilities  will not be  constructed.  Accordingly,  the  Company  has
          accrued a liability of $1,477,000 for these potential  penalties as of
          September  30, 1997,  which amount is reflected as accrued  contractor
          liability.

                                    Continued

                                      F-39

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


17.       Commitments and Contingency, Continued:

          In  December  1996,  the  Company  entered  into  six  indemnification
          agreements  in  connection  with  six  of the  construction  contracts
          entered into by independent  third parties.  These  contracts  contain
          liquidating  damages of $750,000 per contract if  construction  of the
          facilities  is  not  completed  by  June  1,  1998.  The  Company  has
          indemnified  the  contractor  for  these  potential  liabilities.  The
          contracting  party  has  decided  not  to  construct  three  of  these
          facilities   and   accordingly,   no  notice  to  proceed  was  given.
          Accordingly,  the Company  believes the maximum  contingent  liability
          under these  indemnification  agreements  is  $2,250,000.  The Company
          believes that payment of this amount is unlikely.

          In June 1996,  the Company  formed Utah  Synfuel #1 (US #1), a limited
          partnership in which the Company is the general  partner and a limited
          partner and owns a 60% interest.  US #1 received  $3,277,500  from the
          issuance of the 40% limited partner interests. The Company, through US
          #1,  constructed  a coal  briquetting  facility  in Price,  Utah.  The
          facility  was sold to  Coaltech,  a limited  partnership  in which the
          Company is a one percent general partner, in March 1997 for $3,500,000
          which resulted in a loss of approximately $581,000.

          In connection  with this sale, US #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  facility.
          These advanced license fees will be recognized as income over the life
          of the supply and  purchase  agreement  discussed  below.  The Company
          contracted  with  Coaltech to operate the facility for which they will
          receive a quarterly fee which is also based upon  briquettes  produced
          and sold.

          Additionally, the Company and US #1 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 per
          ton.  US #1  agreed to  purchase  from  Coaltech  the  synthetic  fuel
          produced  at its cost  plus one  dollar  per ton.  The  plant  has the
          capacity  to  produce  360,000  tons per  year.  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 they will receive. The Company believes
          the earned  license  fees will  exceed any losses  incurred  under the
          supply and purchase agreement.

                                    Continued

                                      F-40

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


17.       Commitments and Contingency, Continued:

          During  February  1997,  the  Company  entered  into an  agreement  to
          purchase  coal  fines  for use at the  Utah  facility.  The  agreement
          required a payment of $750,000 upon  execution and quarterly  payments
          of approximately $400,000 beginning February 1997 through May 2000 for
          a total  commitment of  $5,500,000.  Amounts paid under this agreement
          are  reflected as advances on inventory  in the  accompanying  balance
          sheet.  Advances on  inventory  will be expensed as the coal fines are
          utilized in production.

          The Company has  experienced  problems at the Utah facility  including
          inadequate clean coal fines as feedstock for operations. The synthetic
          coal  briquettes  produced  during the first few  months of  operation
          contained   high  levels  of  ash  and   resulted   in  sales   prices
          significantly  lower than the price paid under the supply and purchase
          agreement.  This resulted in a loss of $1,547,000 which is included as
          cost of coal briquetting  operations in the accompanying  statement of
          operations.

          The Company is  constructing  a wash plant that will be used to remove
          ash and otherwise improve the quality of the coal fines. The estimated
          cost of the  wash  plant  is  approximately  $4,000,000  and is  being
          financed by one of the Coaltech limited partners.  As of September 30,
          1997,  the Company had incurred costs of  approximately  $1,972,000 in
          connection with this construction. The Company believes the quality of
          the coal fines and resulting synthetic fuel will improve once the wash
          plant is operational.

          In June  1996,  the  Company  formed  Alabama  Synfuels  #1 (AS #1), a
          limited  partnership in which the Company is the general partner and a
          limited  partner  and owns 80%.  AS #1  received  $2,062,500  from the
          issuance of the 20% limited partner interests. The Company, through AS
          #1,  is  constructing  a  coal  briquetting  facility  in  Birmingham,
          Alabama.  The Company  anticipates selling the facility when completed
          for a price  approximately  equal  to  their  cost.  The  Company  had
          incurred  costs of  approximately  $4,600,000 in connection  with this
          construction through September 30, 1997.

                                    Continued

                                      F-41

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


17.       Commitments and Contingency, Continued:

          In  connection  with the  construction  of the Alabama  facility,  the
          Company  entered into a supply  agreement for coal fines to be used at
          the Alabama facility. Under the agreement, the Company is obligated to
          purchase  a minimum of 20,000  tons of coal fines per month  beginning
          October 1996 through December 2001. The Company anticipates assignment
          of this  agreement to the  purchaser of the Alabama  facility when the
          sale is completed.  As of September 30, 1997 the Company had purchased
          coal  fines  totalling  $1,736,000  under  this  agreement  which  are
          reflected as inventory.

          In May 1997 the Company  entered into an agreement for the purchase of
          coal fines for a  facility  located in West  Virginia.  The  agreement
          provides  that the seller will supply  washed coal fines with  certain
          specifications at prescribed  prices.  The agreement also provided the
          seller with a percentage  of the net proceeds  received by the Company
          from this facility.

          In May 1995,  the Company  entered into an agreement with Geneva Steel
          Company  ("Geneva")  to build and  operate a  commercial  iron  revert
          briquetting  plant (the "Geneva  Plant").  The facility  never reached
          commercial  productivity levels and is not operational.  The agreement
          with   Geneva  has  expired   and   accordingly,   the  Company  is  a
          tenant-at-will  with respect to the  property  and building  where the
          briquetting  equipment is located.  The Company no longer  expects the
          Geneva Plant to be used as an iron revert briquetting  facility at the
          Geneva site. In December  1996,  the Company agreed to install a dryer
          in the Geneva Plant that would allow for the operation of the plant as
          a synthetic fuel manufacturing facility. The Company plans to use this
          equipment,  carried at $870,000 in the accompanying balance sheet, for
          the production of synthetic fuel.

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

                                    Continued

                                      F-42

<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS, Continued


17.       Commitments and Contingency, Continued:

          During  January 1996,  the Company  entered into an agreement  with an
          entity  to  form  five  entities  to  commercialize  and  exploit  the
          Company's  Briquetting  Technology.  This  agreement was  subsequently
          modified and provides for the entity to receive a 1.6%  interest in AS
          #1 and the use of the  Briquetting  Technology for which they will pay
          the Company a one-time  license fee based upon annual  synthetic  fuel
          production.

          This entity  also  introduced  the  Company to one of the  independent
          third parties that is constructing four facilities as discussed above.
          Under the agreement,  this entity can receive  royalties  equal to the
          amount to be received by the Company on approximately  one facility if
          the  entity  does not  construct  facilities  so as to  reach  certain
          production  levels.  Based  upon  current  information,   the  Company
          believes that the maximum amount of royalties under the agreement that
          would  otherwise  be earned by the  Company  on one  facility  will be
          payable to this entity.

          The Company has issued orders for the purchase of equipment to be used
          in certain coal  briquetting  facilities.  The total  commitment under
          these equipment purchase orders at September 30, 1997 was $2,101,272.

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

          The Company is also involved in numerous 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
          statement of operations or the financial position of the Company.

          The Company  has entered  into  employment  agreements  with the Chief
          Executive Officer, Chief Financial Officer and a Vice President of the
          Company.  The agreements extend for a period of three years and expire
          June 1, 1999,  January 1, 2000 and March 20, 2000,  respectively.  The
          agreements  provide  for  annual  salaries  and  benefits.  All  three
          agreements provide for termination  benefits under specific conditions
          ranging from 100% to 200% of the then current annual salaries.

                                      F-43
<PAGE>

Section No.    Exhibit No.    Description                               Location

2              2.1            Agreement and Plan of Reorganization, dated    (1)
                              July 1, 1993 between the Company and the
                              Stockholders of R1001

2              2.2            Agreement and Plan of Merger dated             (1)
                              August 14, 1995 between the Company
                              and Covol Technologies, Inc., a
                              Delaware corporation

2              2.3            Stock Purchase Agreement, dated July 1,        (1)
                              1993, among the Company, 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              2.4            Stock Sale Transaction Documentation,          (1)
                              effective as of September 30, 1994,
                              between the Company and Farrell F.
                              Larson regarding Larson Limestone
                              Company, Inc.

2              2.5            Stock Purchase Agreement dated February        (1)
                              1, 1996 by and among the Company,
                              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              2.5.1          Amendment to Share Purchase Agreement          (1)
                              regarding the sale of the Construction
                              Companies

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

3              3.1            Certificate of Incorporation of                (1)
                              the Company

3              3.1.1          Certificate of Amendment of the                (1)
                              Certificate of Incorporation of the
                              Company dated January 22, 1996

3              3.1.2          Certificate of Amendment of the                (6)
                              Certificate of Incorporation dated
                              June 25, 1997

3              3.1.3          Certificate of Designation, Number,            (7)
                              Voting Powers, Preferences and
                              Rights of the Company's Series A 6%
                              Convertible Preferred Stock
                              (Originally designated as Exhibit
                              No. 3.1.2)

                                       59
<PAGE>

3              3.1.4          Certificate of Designation, Number,            (8)
                              Voting Powers, Preferences
                              and Rights of the Company's Series B
                              Convertible Preferred Stock
                              (Originally designated as Exhibit
                              No. 3.1.3)

3              3.2            By-Laws of the Company                         (1)

3              3.2.1          Certificate of Amendment to Bylaws             (1)
                              of the Company dated January
                              31, 1996

3              3.2.2          Certificate of Amendment to the Bylaws         (6)
                              dated May 20, 1997 (Originally designated
                              as Exhibit No. 3.2.1)

3              3.2.3          Certificate of Amendment to the                (6)
                              Bylaws dated June 25, 1997
                              (Originally designated as
                              Exhibit No. 3.2.2)

9              9.1            Special Powers of Attorney Coupled With        (1)
                              an Interest dated February 1, 1996
                              between the Company, Gerald Larson and
                              Michael McEwan

10             10.1           License Agreement, dated June 30, 1995,        (1)
                              between the Company and Greystone
                              Environmental Technologies, relating to
                              the Greystone Joint Venture

10             10.1.1         First Amendment dated January 3, 1996 to       (1)
                              the License Agreement dated June 30, 1995
                              between the Company and Greystone
                              Environment Technologies

10             10.2           Briquetting Services Agreement, dated          (1)
                              May 5, 1995, between Geneva Steel Company
                              and the Company

10             10.2.1         Amended and Restated Briquetting               (3)
                              Service Agreement, dated May 14, 1996,
                              between the Company and Geneva Steel Company

10             10.3           Lease Agreement, dated May 5, 1995             (1)
                              between Geneva Steel Company, as landlord,
                              and the Company, as tenant

10             10.3.1         First Amendment to Lease Agreement,            (3)
                              dated May 14, 1996 between Geneva Steel
                              Company, as landlord, and the Company, as
                              tenant

10             10.4           Master Equipment Lease Agreement, dated        (1)
                              May 4, 1995, between Keycorp Leasing Ltd.
                              and the Company

                                       60
<PAGE>

10             10.5           1995 Stock Option Plan                         (1)

10             10.5.1         First Amendment to the 1995 Stock              (1)
                              Option Plan

10             10.6           Employment Agreement, dated January            (1)
                              1, 1992, with Kenneth M. Young

10             10.7           Employment Agreement, dated July 1,            (1)
                              1992, with Russell Madsen

10             10.8           Lease Agreement, dated May 31, 1994,           (1)
                              between the Company and Byrleen Hanson
                              regarding Carbon County, Utah

10             10.9           Standard Form of Agreement between Owner       (1)
                              and Design Builder dated December 28,
                              1995 between the Company and Lockwood
                              Greene Engineers, Inc.

10             10.9.1         Notice to Proceed from the Company to          (1)
                              Lockwood Greene Engineers, Inc. dated
                              January 14, 1996

10             10.9.2         Letter Agreement with Lockwood Greene          (1)
                              Engineers, Inc. to extend notice dates.

10             10.9.3         Letter dated July 26, 1996 from                (3)
                              Lockwood Greene Engineers, Inc.
                              and the Memorandum of Understanding
                              between Covol Technology, Inc. and
                              Lockwood Greene Engineers, Inc. dated
                              August 28, 1996

10             10.9.4         Amendment to Standard Form of Agreement        (3)
                              between Owner and Design/Builder dated
                              December 28, 1995, dated September 16,
                              1996, between the Company and Lockwood
                              Greene Engineers, Inc.

10             10.10          Engagement Letter dated December 18,           (1)
                              1995 by and between the Company and
                              Smith Barney

10             10.10.1        Termination Letter, dated July 8,              (3)
                              1996, from Smith Barney

10             10.11          Letter of Understanding dated January          (1)
                              30, 1996 between the Company and
                              CoBon Energy, LLC

10             10.11.1        Modification of Letter of Understanding        (3)
                              dated August 20, 1996 between the
                              Company and CoBon Energy, LLC

                                       61
<PAGE>

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

10             10.11.3        Project Development Agreement, dated            *
                              December 30, 1996, between the Company
                              and CoBon Energy LLC

10             10.11.4        Modification of Project Development             *
                              Agreement, dated December 31, 1996,
                              between the Company and CoBon Energy, LLC

10             10.12          [Intentionally Omitted]                        (1)

10             10.13          Promissory Note dated February 15,             (1)
                              1996 in favor of the Company from
                              Michael McEwan and Gerald Larson

10             10.14          [Intentionally Omitted]

10             10.15          Agreement between Alabama Power Company        (3)
                              and the Company for the Sale and Purchase
                              of Coal, dated April 16, 1996, between
                              the Company and the Alabama Power Company

10             10.16          Employment Agreement, dated June 1, 1996       (3)
                              with Brent M. Cook

10             10.16.1        Stock Option Agreement dated June 1, 1996      (3)
                              with Brent M. Cook

10             10.17          Letter Agreement, dated March 6, 1996,         (3)
                              among the Company, AGTC, Inc., Alpine
                              Coal Company, Inc, and E.J. Hodder &
                              Associates, Inc. regarding services to
                              investigate, identify and
                              participate in site selection

10             10.18          Letter dated July 19, 1996 from the            (3)
                              Company canceling the Site
                              Identification Agreement

10             10.19          Term Sheet, dated August 22, 1996,             (3)
                              from Company to Byrleen Hanson
                              regarding purchase of Price, Utah
                              office building

10             10.20          Primary Agreement, dated November 6,           (3)
                              1996, between the Company and Savage
                              Industries, Inc.

                                       62
<PAGE>

10             10.20.1        Mojave Agreement, dated November 6,            (3)
                              1996, between the Company and Savage
                              Industries, Inc.

10             10.21          Release to all claims, dated September         (3)
                              13, 1996, executed by Maynard Moe

10             10.22          Letter of Understanding, dated                 (3)
                              September 13, 1996, between the
                              Company and E.J. Hodder & Associates,
                              Inc. regarding the sale of
                              the Port Hodder facility to the Company

10             10.23          Sublease, dated September 9, 1996, between     (3)
                              the Company and Parker Towing Company,
                              Inc. regarding the lease of approximately
                              16 acres located in Tuscaloosa County,
                              Alabama

10             10.24          Supply Agreement, dated September 11,          (3)
                              1996, among the Company, K-Lee
                              Processing, Inc. and Concord Coal
                              Recovery Limited Partnership

10             10.25          PacifiCorp Financial Services, Inc.            (3)
                              Letter of Intent (Covol Technologies)
                              dated September 12, 1996

10             10.26          Exclusive Financial Advisor Agreement,         (3)
                              dated September 16, 1996, between the
                              Company and Coalco Corporation

10             10.27          Settlement Agreement, dated September          (3)
                              17, 1996, among the Company,
                              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             10.28          Debenture Agreement and Security               (3)
                              Agreement, dated December 20, 1996,
                              between AJG Financial Services, Inc.
                              and the Company

10             10.29          Arthur J. Gallagher & Co. Letter of            (3)
                              Intent, dated November 13, 1996

10             10.30          Lease Agreement, dated December 12,            (3)
                              1996, between the Company and UPC,
                              Inc. regarding Price City, Utah property

                                       63

<PAGE>

10             10.31          1996 Standard Form of Agreement between        (3)
                              Owner and Design/Contractor

10             10.32          Form of Limited Partnership Agreements         (3)
                              for Alabama Synfuel #1, Ltd. ("AS #1)
                              and Utah Synfuel #1, Ltd. (US #1)

10             10.33          Utah Project Purchase Agreement, dated         (4)
                              as of March 7, 1997, by and among the
                              Company, US #1, a Delaware limited
                              partnership, and Coaltech No. 1, L.P.,
                              a Delaware limited partnership
                              ("Coaltech")

10             10.34          License and Binder Purchase Agreement,         (4)
                              dated as of March 7, 1997, by and among
                              the Company, US #1 and Coaltech

10             10.35          Operation and Maintenance Agreement,           (4)
                              dated as of March 7, 1997, by and
                              between the Company and Coaltech

10             10.36          Purchase and Supply Agreement, dated           (4)
                              as of March 7, 1997, by and among the
                              Company, US #1 and Coaltech

10             10.37          Abandonment Option Agreement, dated            (4)
                              as of March 7, 1997, by and among the
                              Company and the limited partners of Coaltech

10             10.38          Convertible Loan and Security Agreement,       (5)
                              dated as of March 20, 1997, by and between
                              the Company and PacifiCorp Financial
                              Services, Inc. ("PacifiCorp")

10             10.38.1        Amendment to Convertible Loan and               *
                              Security Agreement, dated December 12,
                              1997 by and between the Company and
                              PacifiCorp

10             10.39          Alabama Project Purchase Agreement             (5)
                              ("Alabama Agreement") dated as of March
                              20, 1997, by and among the Company, AS #1
                              and Birmingham Syn Fuel, L.L.C.
                              ("BSF")

10             10.39.1        Letter Amendment, dated June 27, 1997,          *
                              to Alabama Agreement.

10             10.39.2        Letter Amendment, dated July 7, 1997,           *
                              to Alabama Agreement.

10             10.39.3        Letter Amendment, dated August 28, 1997,        *
                              to Alabama Agreement.

10             10.39.4        Letter Amendment, dated December 12,            *
                              1997, to Alabama Agreement.

                                       64
<PAGE>

10             10.39.5        Amended and Restated License Agreement,         *
                              and Binder Purchase dated December 12,
                              1997, by and among the Company, AS #1 and
                              BSF.

10             10.40          Conditional Option Agreement, dated as         (5)
                              of March 20, 1997, by and among Birmingham
                              Syn Fuel I, Inc., Birmingham Syn Fuel II,
                              Inc., PacifiCorp, AS #1 and the Company

10             10.41          Registration Rights Agreement, dated as of     (5)
                              March 20, 1997, by and between the Company
                              and PacifiCorp

10             10.42          Amended and Restated Agreement Concerning       *
                              Additional Facilities, dated December 12, 1997, by
                              and between PacifiCorp.,  Birmingham Syn Fuel, LLC
                              and the Company

10             10.43          Lease Agreement between Industrial              *
                              Management Engineering, Inc. and the
                              Company

10             10.44          Employment Agreement, dated January 1,          *
                              1997 with Stanley M. Kimball

10             10.45          License and Binder Purchase Agreement,          *
                              dated December 14, 1997, between
                              Appalachian Synfuel, LLC and the Company

10             10.46          Financing Agreement, dated November 14,         *
                              1997, between the Company and CoBon
                              Energy, L.L.C.

10             10.47          License Agreement, dated as of August 5,        *
                              1997, by and between Pelletco Corporation
                              and the Company

10             10.48          Preparation Plant and Find Ponds Lease          *
                              (Wellington, Utah), dated February 21,
                              1997, between Earthco and the Company

10             10.49          Agreement Concerning Additional                 *
                              Facilities, dated December 27, 1996,
                              between AJG Financial Services, Inc.
                              and the Company

10             10.50          Form of Agreement for Technology                *
                              Licensing of Facilitation, dated
                              December 31, 1996, between PC West
                              Virginia Synthetic Fuel #1, LLC
                              and the Company

10             10.51          Employment agreement dated March 20,            *
                              1997 with Max Sorenson

16             16.1           Letter to Securities and Exchange              (1)
                              Commission, dated March 24, 1995,
                              from Jones, Jensen & Orton & Company,
                              certified public accountants

                                       65
<PAGE>

21             21.1           List of Subsidiaries of the Company             *

27             27.1           Financial Data Schedule                         *
------------------------

*        Attached hereto.

(1)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the Company's  Registration  Statement on Form 10, filed  February
         26, 1996.
(2)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the Company's Registration Statement on Form 10/A, Amendment No.
         2, dated April 24, 1996.
(3)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the  Company's  Annual  Report on Form 10-K,  for the fiscal  year
         ended September 30, 1996.
(4)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the Company's Current Report on Form 8-K, dated March 10, 1997.
(5)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the  Company's  Quarterly  Report on Form 10-Q,  for the quarterly
         period ended March 31, 1997.
(6)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the  Company's  Quarterly  Report on Form 10-Q,  for the quarterly
         period ended June 30, 1997.
(7)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the Company's Current Report on Form 8-K, dated August 19, 1997.
(8)      This exhibit is incorporated  herein by reference to the exhibits filed
         with the  Company's  Current  Report on Form 8-K,  dated  September 18,
         1997.

b.       Reports on Form 8-K

         The Company filed a Report on Form 8-K, dated March 10, 1997,  covering
Item 2,  Acquisition or  Disposition of Assets,  with respect to the sale of the
Utah  Plant to  Coaltech.  (See  "ITEM 1.  BUSINESS--Business  of  Company--Utah
Plant.")

         The Company  filed a Report on Form 8-K,  dated May 23, 1997,  covering
Item 9, Sales of Equity Securities Pursuant to Regulation S.

         The Company  filed a Report on Form 8-K,  dated July 7, 1997,  covering
Item 9, Sales of Equity Securities Pursuant to Regulation S.

         The Company filed a Report on Form 8-K, dated August 19, 1997, covering
Item  5,  Other  Events,  with  respect  to  the  issuance  of the  Series  A 6%
Convertible  Preferred  Stock and the  appointment  of Mr.  Herickhoff  as a new
director.

                                       66
<PAGE>

         The  Company  filed a Report on Form 8-K,  dated  September  18,  1997,
covering  Item 5, Other  Events,  with  respect to the  issuance of the Series B
Convertible Preferred Stock and a private placement of common stock.

                                       67
<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/ Stanley M. Kimball
                                 -----------------------------------------------
                                 Stanley M. Kimball, Principal Financial Officer

                              Date: January 12, 1998

         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/ Raymond J. Weller                  Chairman                 January 12, 1998
----------------------
Raymond J. Weller


/s/ Brent M. Cook         Chief Executive Officer (Principal    January 12, 1998
-----------------------   Executive Officer) and Director
Brent M. Cook


/s/ Stanley M. Kimball      Chief Financial Officer, Treasurer  January 12, 1998
-----------------------   and Director (Principal Financial and
Stanley M. Kimball                Accounting Officer)


/s/ Alan D. Ayers           Vice President of Administration    January 12, 1998
-----------------------
Alan D. Ayers


/s/ George W. Ford        Vice President of Engineering and     January 12, 1998
-----------------------              Construction
George W. Ford


/s/ Steven R. Brown       Vice President of Engineering and     January 12, 1998
-----------------------              Construction
Steven R. Brown

/s/ Russell G. Madsen               Vice President              January 12, 1998
-----------------------
Russell G. Madsen

                                       68
<PAGE>

/s/ Max E. Sorenson                 Vice President              January 12, 1998
---------------------------
Max E. Sorenson


/s/ Asael T. Sorensen      Secretary and General Counsel        January 12, 1998
---------------------------
Asael T. Sorensen

/s/ Dee J. Priano                  Vice President               January 12, 1998
---------------------------
Dee J. Priano

/s/ DeLance W. Squire                 Director                  January 12, 1998
---------------------------
DeLance W. Squire


/s/ Vern T. May                       Director                  January 12, 1998
---------------------------
Vern T. May


/s/ James A. Herickhoff               Director                  January 12, 1998
---------------------------
James A. Herickhoff


/s/ John P. Hill, Jr.                 Director                  January 12, 1998
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John P. Hill, Jr.

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