UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended September 30, 1999,

                                       or

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

                  For the transition period from _____ to _____

                         Commission file number 0-27808

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

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

              3280 North Frontage Road
                     Lehi, Utah                         84043-9534
                     ----------                         ----------
      (Address of principal executive offices)          (Zip Code)

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

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

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

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

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

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of January 4, 2000 was  $10,904,271  based upon the closing
price on the Nasdaq National  Market(R) reported for such date. This calculation
does not reflect a determination that persons whose shares are excluded from the
computation are affiliates for any other purpose.

         The number of shares outstanding of the registrant's common stock as of
January 4, 2000 was 17,176,911.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  following  document  are  incorporated  herein  by  reference:
Portions  of  the  registrant's  definitive  proxy  statement  to be  issued  in
connection with registrant's  annual  stockholders'  meeting to be held February
29, 2000.

                                        1
<PAGE>

                                TABLE OF CONTENTS

                                                                          Page
PART I
     ITEM 1.   BUSINESS......................................................  3
     ITEM 2.   PROPERTIES.................................................... 15
     ITEM 3.   LEGAL PROCEEDINGS............................................. 15
     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 16

PART II
     ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS........................................... 17
     ITEM 6.   SELECTED FINANCIAL DATA....................................... 20
     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS........................... 21
     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..... 29
     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 29
     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE............................29

PART III
     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 29
     ITEM 11.  EXECUTIVE COMPENSATION........................................ 29
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT.................................................... 30
     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 30

PART IV
     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
               ON FORM 8-K................................................... 30
     SIGNATURES.............................................................. 37

Forward-Looking Statements

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

                                        2
<PAGE>

                                     PART I

ITEM 1. BUSINESS

The Company

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

Company History

         Covol was  originally  incorporated  in  Nevada in 1987  under the name
Cynsulo,  Inc. but  underwent  various name changes from 1987 to 1995.  In 1991,
Covol acquired technology  consisting of binding agents used to make briquettes.
From 1991 to 1995  Covol  focused on the  research  and  development  of binding
agents  principally  for iron, coal and coke waste  particles.  Covol's name was
changed  to  Covol  Technologies,   Inc.  in  1995,  at  which  time  Covol  was
reincorporated in Delaware.

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

Background

         As a result of efforts by government  and business to  efficiently  use
diminishing   resources,   the  recycling  industry  has  developed   innovative
approaches  to recycle,  recover  and/or  enhance the  usefulness  of wastes and
by-products.  Covol has developed a family of binder  technologies  used to form
fine  materials  from wastes and  by-products  into  briquettes to capture their
inherent resource value.

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

         Covol's binder technologies are being used to transform coal fines into
a useable  fuel.  Coal fines are small  particles  of coal  produced  as a waste
by-product of coal  production.  A recent study of the coal  industry  estimated
that there are more than 2 billion  tons of coal fines  residing  in waste ponds
and landfills in the United States alone. Although coal fines have inherent fuel
value,  they present recovery and handling  challenges that make it difficult to
capture that value. Covol's binder technologies  molecularly bond the coal fines
into a formed  fuel  through a  significant  chemical  reaction;  the  resulting
product has been classified as a "synthetic  fuel" within the meaning of Section
29 of the U.S.  Internal Revenue Code. Sales of the fuel therefore qualify for a
significant tax credit.

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

         The Covol  binder  technologies  can also be used to convert  iron rich
wastes into usable iron.  Mill scale,  bag-house  dust,  furnace  sludge,  blast
furnace dust and other iron rich materials, are all waste by-products created by
steel producers.  These by-products present environmental problems for the steel
industry.  Because of their  high iron  content,  they also have high  potential
value. Approximately 775 million tons of finished steel are consumed

                                        3
<PAGE>

annually in the world with the U.S.  producing  approximately  100 million tons.
The capture of even a fraction of the waste and other  by-products of this steel
production  in the  U.S.  alone  could  provide  millions  of tons of  feedstock
material for processing.  On a test basis,  the Covol binder  technologies  have
been  demonstrated  to be  capable  of  producing  briquettes  from  such  steel
production  wastes.  Such briquettes can be further  processed in metal reducing
furnaces to form high grade pig iron, a common form of feed material used in the
steel industry.

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

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

Covol Binder Technologies

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

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

Business Strategy

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

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

         For the past three years  Covol's  business  strategy  has been focused
almost  exclusively upon synthetic fuel from coal fines.  There are currently 24
synthetic  fuel  facilities  located  in 8  states  that are  utilizing  Covol's
synthetic   fuel   technology.   Twenty-two  of  the  facilities  are  owned  by
unaffiliated  third  parties  and two are  currently  owned by  Covol.  Covol is
actively pursuing the sale of the two facilities that it owns.

         All of  the  synthetic  fuel  facilities  were  initially  placed  into
operation  before the end of the second  calendar  quarter of 1998 and Covol and
its licensees are currently in the process of increasing  production  levels and
entering into contracts for product  sales.  Covol is working with its licensees
to improve  production and optimize quality.  Feedstock  supply,  production and
product  quality and the marketing of the synthetic fuel all directly affect the
amount and timing of royalties to be received by Covol from the  synthetic  fuel
facilities.  Accordingly,  assisting  licensees to optimize the production  from
these facilities is one of Covol's highest priorities.

                                        4
<PAGE>

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

         Another  engineered fuel application Covol is pursuing is coke. Coke is
processed metallurgical coal which serves as both a fuel and a reducing agent in
iron and steel  making.  The  production  and  handling  of coke  produces  fine
particles of coke dust. The  aggregation of coke dust into  briquettes  that are
designed to withstand  the rigors of  handling,  heat and weight in metal making
furnaces results in a useable fuel. Covol has patented  technology and is in the
process of patenting additional technology related to coke dust processing.

         Engineered Resources. Steel mills, nonferrous metal producers and other
mineral  industries  produce  wastes  and  other  by-products  that may  contain
valuable  unrecovered   resources.   These  wastes  often  create  environmental
compliance, storage and disposal problems. The Covol binder technologies provide
a way to solve disposal problems,  extract the inherent  resources,  process the
materials  with  current  industrial  methods,  and enhance the  materials  with
qualities that add value and that customize the materials for alternative  uses.
The resulting products are collectively  referred to as "engineered  resources."
Covol has devoted  significant  research and development  resources to improving
and  perfecting  its  technology  for these  applications,  particularly  in the
processing of iron production wastes.

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

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

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

Subsidiaries

         Covol has organized various special purpose entities to facilitate some
of the transactions  relating to the 24 synthetic fuel facilities.  The entities
are listed with  Covol's  position and interest in the entity as of December 31,
1999 described as follows:

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

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

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

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

o        Carbon Synfuel, L.L.C., a Utah limited liability company of which Covol
         is the managing member and owns 99%

o        Pocahontas  Synfuel,  L.L.C., a Utah limited liability company of which
         Covol is the managing member and owns 99%

                                        5
<PAGE>

o        Mountaineer  Fuels,  L.L.C., a Utah limited  liability company of which
         Covol is the managing member and owns 99%

o        Synfuel  Investments,  Inc., a Utah  corporation  of which Covol is the
         sole stockholder;  Synfuel  Investments owns a 1% ownership interest in
         each of Carbon Synfuel, Pocahontas Synfuel, and Mountaineer Fuels.

         The following chart illustrates  Covol's corporate  structure.  Covol's
ownership directly or indirectly of each subsidiary is 100%.
<TABLE>
<CAPTION>

                                                COVOL TECHNOLOGIES, INC.
                                           ------------------------------------
<S>            <C>          <C>               <C>              <C>              <C>             <C>              <C>
                                               Common-
  Alabama         Utah       Flat Ridge         wealth            Carbon         Pocahontas      Mountaineer        Synfuel
  Synfuel       Synfuel         Corp.          Synfuel,          Synfuel,         Synfuel,         Fuels,         Investments,
  #1, Ltd.      #1, Ltd.                        L.L.C.            L.L.C.           L.L.C.          L.L.C.             Inc.
  --------      -------        ------         --------          ----------        ------           -----              ----
</TABLE>

Tax Credits

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

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

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

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

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

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

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

                                        6
<PAGE>

o        there has been no change in the applicable law,

o        the PLR was originally issued for a proposed transaction and

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

         Covol  received  its PLR in September  1995.  At least seven other PLRs
covering  fourteen of the synthetic fuel  facilities have been obtained by third
parties in  connection  with  licenses  of Covol's  synthetic  fuel  technology.
However,  all  PLRs are only  binding  with  respect  to the  specific  projects
addressed  in the PLR and may only be relied on by the party  that has  obtained
the PLR.

         The Section 29 credit is equal to  approximately  $6.10 in 1997 dollars
for each oil barrel  equivalent of the qualifying  fuel produced and sold.  This
equates to  approximately  $20.00-$28.00  per ton of synthetic fuel  briquettes,
depending  upon the  recoverable  heat  content.  The oil barrel  equivalent  is
defined  generally as an amount of fuel having a recoverable heat content of 5.8
million Btu's.

         The Section 29 credit was designed to provide protection for qualifying
fuels against market price declines,  and it is therefore subject to a phase out
after the  unregulated  oil price  reaches  specified  levels  under an annually
adjusted  formula.  In 1997  dollars,  the credit  would have phased out had the
reference  price for oil exceeded  $47.78 per barrel,  but the  reference  price
determined for 1998 was $10.88 and no phase out occurred.  There presently is no
reference  price for 1999.  However,  the average  price of oil in the U.S.  was
higher in 1999 than 1998. 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 tax code  contains  no  provision  for  carryback  or
carryforward of Section 29 credits.  Once earned, the credits are not subject to
subsequent  recapture.  By virtue of the various  limitations  and other factors
described  above,  there  can be no  assurances  that any  particular  amount of
Section 29 credit will be allowable and usable.

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

Synthetic Fuel Manufacturing Facilities

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

                     SYNTHETIC FUEL MANUFACTURING FACILITIES

                         No. of
   Name of Facility      Plants          Location           Owner/Licensee

 Utah Synfuel #1            1       Price, Utah         Coaltech No. 1 L.P.
 Carbon Synfuel             1       Price, Utah         DTE Kentucky, L.L.C.
 Mohave Synfuels            1       Laughlin,           Mohave Synfuels,
                                    Nevada              L.L.C.
 Birmingport                1       Mulga,              Birmingham Syn
                                    Alabama             Fuel, L.L.C.

                                        7
<PAGE>

 Brookwood                  1       Brookwood,          PacifiCorp Syn
                                    Alabama             Fuel, L.L.C.
 Pumpkin Center             2       Flat Creek,         PacifiCorp Syn
  #1 & #2                           Alabama             Fuel, L.L.C.
 Norton                     1       Norton,             PC Virginia
                                    Virginia            Synthetic Fuel #1,
                                                        L.L.C.
 Chelyan                    1       Chelyan, West       PC West Virginia
                                    Virginia            Synthetic Fuel #1,
                                                        L.L.C.
 Muddlety                   1       Muddlety, West      PC West Virginia
                                    Virginia            Synthetic Fuel #2,
                                                        L.L.C.
 Eckman                     1       Eckman, West        PC West Virginia
                                    Virginia            Synthetic Fuel #3,
                                                        L.L.C.
 Appalachian                2       Peccus, West        Appalachian
  Synfuel                           Virginia            Synfuel, L.L.C.
 Mountaineer                1       Tallmansville,      Mountaineer Fuels,
  Fuels                             West Virginia       L.L.C.
 Pocahontas                 1       Northfork,          Pocahontas
  Synfuel                           West Virginia       Synfuel, L.L.C.
 Ginger Hill                1       Ginger Hill,        Ginger Hill
                                    Pennsylvania        Synfuels, L.L.C.
 Robena                     1       Paisley,            Robena, L.L.C.
                                    Pennsylvania
 River Hill                 1       Karthaus,           DTE River Hill,
                                    Pennsylvania        L.L.C.
 Pennsylvania               1       Somerset,           Central City
  Synfuel Project                   Pennsylvania        Synfuel, L.L.C.
 USA Coal, #1,              4       Pawnee, Illinois    A.J.G. Financial
 #2, #3, & #4                                           Services, Inc.
 Pleasant Ridge             1       Alledonia, Ohio     Pleasant Ridge
                           ---                          Synfuels, L.L.C.
 Total                     24

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

         Covol obtained  financing and successfully  constructed five facilities
from its construction  agreements.  Of these, one was built by TIC for Covol and
sold to  Birmingham  Syn  Fuel,  L.L.C.,  a  special  purpose  entity  owned  by
PacifiCorp Financial Services, Inc., two were built for Covol by Centerline, one
of which was sold to DTE Kentucky, L.L.C., a special purpose entity owned by DTE
Energy Services, Inc., and one of which is held for sale

                                        8
<PAGE>

by  Covol;  two were  built by TIC,  one of which  was sold to DTE  River  Hill,
L.L.C., a special purpose entity owned by DTE Energy Services,  Inc., and one of
which is held for sale by Covol.

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

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

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

         Unused  Contracts.  Covol did not build  facilities  under  five of its
fourteen construction agreements, including the two PICOR contracts as part of a
joint venture with Savage Industries.  The construction  agreements provided for
penalties  if the  construction  was not pursued by Covol.  Covol  accrued  this
liability during the fiscal year ended September 30, 1997 and paid all penalties
related to the two PICOR contracts.  The remaining liability attributable to the
other three contracts was $755,000 as of September 30, 1999. Covol believes that
construction under any of the unused contracts is not likely.

         Additional  Licensed  Facilities.  In addition  to the nine  facilities
constructed under Covol's construction agreements, Covol licensed its technology
to eight licensees for use at fifteen facilities constructed by these licensees.
These licensees entered into their own construction agreements prior to December
31, 1996, in compliance with Section 29.

         In total,  Covol has  licensed or  constructed  plants  using the Covol
binder technologies at 24 synthetic fuel facilities that operate at 18 locations
in the Rocky Mountain region, Southern Appalachia, Central Appalachia, Northeast
Appalachia,  Northwest Appalachia, and the Illinois Basin, which are the primary
coal supply regions of the United States.  For all facilities,  the construction
agreements  were entered into prior to December  31,  1996.  In most  instances,
Covol entered into a construction  contract which was either  fulfilled by Covol
or later assigned to a licensee.  In certain  instances,  the licensees  entered
into their own construction contracts.

         A facility  generally consists of a conditioner and binder additive and
mixing system,  briquetting or aggregating equipment, a product dryer, and other
supporting  systems.  However,  each facility was  individually  engineered  and
constructed,   including  systems  and  components  specially  selected  by  the
respective  owners,  so that there is  variation  in features  from  facility to
facility.

         License and Binder Supply Agreements.  All non-Covol entities that have
constructed or own facilities using the Covol binder  technologies  have entered
into a technology  license and binder supply agreement with Covol.  Many license
agreements  provided for an initial license fee,  payable upon reaching  project
milestones. Covol has received most of the initial license fees related to these
facilities  which  revenue  will be  recognized  by  Covol  over the life of the
license agreements. In addition, pursuant to many of the license agreements, the
licensee pays a quarterly  earned  license fee generally at a prescribed  dollar
amount  multiplied by the recoverable  heat  denominated in Btu's in the product
produced and sold during the calendar  quarter.  The prescribed dollar amount is
subject to adjustment based upon the "inflation  adjustment factor" as set forth
in Section 29 of the tax code.  In some cases,  the amount to be paid is subject
to  adjustment  to the extent  that  licensees  incur an  operating  loss on the
production and sale of

                                        9
<PAGE>

synthetic fuel,  exclusive of the amount  licensees pay as a license fee for the
use of the technology. Some license agreements also provide for a goal fee based
on time schedules and production  amounts. In most cases, the fees paid to Covol
under the license  agreements  are not based on the sales price of the synthetic
fuel product.  The license  agreements  generally have a term until the later of
January 1, 2008 or the  corresponding  date after  which tax  credits may not be
claimed or are not otherwise available under Section 29 of the tax code.

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

         o        a fixed price, or

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

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

Supply of Raw Materials

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

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

         Coal  fines  cleaning  is a distinct  technology  and to  implement  it
successfully  requires  analysis  of the  particular  coal  refuse to  determine
appropriate  plant design and to determine whether feedstock can be economically
produced.  Capital requirements for coal cleaning or preparation plants adequate
to supply a synthetic  fuel plant can be in excess of $4 million.  Coal cleaning
plants  require  six  months  or more to design  and  construct.  A  feasibility
analysis  must be  performed to  determine  whether the savings  achieved by the
plant justify the capital costs of construction together with operational costs,
which can vary  between  approximately  $5-10 per ton.  The costs of a  cleaning
plant are compared to the alternative of purchasing clean coal for blending. The
decision to construct a coal cleaning plant does not delay delivery of synthetic
fuel to market because in all cases clean blending coal is available to purchase
as an immediate alternative.  The decision to construct a coal cleaning plant is
based on how a facility most economically obtains clean feedstock.

         In facilities owned and operated by licensees, the licensee secures its
own supply of coal fines.  Licensees that are also coal producers  utilize their
own feedstock  sources.  Nonproducer  licensees secure deposits of coal fines to
supply their facilities.

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

                                       10
<PAGE>

Sale of Facilities

         Covol has sold four  synthetic  fuel  facilities.  The  following  is a
summary of each sale:

         Utah  Synfuel #1. On March 10,  1997,  Utah Synfuel #1 Ltd., a Delaware
limited  partnership  in which  Covol was at the time a 64%  owner  and  general
partner,  sold the Utah synthetic fuel facility for $3.5 million, in the form of
a nonrecourse  promissory note bearing interest at 9.6552% per annum and payable
in 44 equal  quarterly  installments,  all in  accordance  with the Utah Project
Purchase  Agreement,  dated as of March 7, 1997,  between Covol, Utah Synfuel #1
and  Coaltech  No. 1 L.P.  The sale of the Utah  facility  resulted in a loss of
approximately $582,000 to Utah Synfuel #1. The promissory note is collateralized
by a security interest in the Utah facility, and in the event of a default under
the  promissory  note,  Covol's and Utah  Synfuel #1's sole right to recovery is
limited to the Utah facility  without  recourse  against  Coaltech.  The loss of
$582,000 was not recognized for financial reporting purposes and as described in
Note 4 to the Consolidated  Financial Statements,  all note payments,  including
interest, reduce the carrying amount of the note receivable.

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

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

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

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

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

         As part of the sale of the Utah  facility,  Covol and Utah  Synfuel  #1
entered into a Supply and Purchase Agreement with Coaltech. Under the agreement,
Covol agreed to provide  coal fines to the Utah  facility  for  processing  into
synthetic  fuel at an amount equal to Covol's per ton costs,  including any wash
costs.  Utah Synfuel #1 also agreed to purchase from Coaltech the synthetic fuel
produced at Coaltech's  cost plus one dollar per ton.  Coaltech has the right to
market its synthetic fuel to a third party,  with Utah Synfuel #1 having a right
of first refusal to purchase such synthetic fuel. Covol has incurred a loss each
quarter in  connection  with this  agreement.  The Utah  Synfuel #1 facility has
experienced  several  problems,  including  uncertain  coal fines  feedstock and
product sales  commitments.  Subsequent to September  30, 1999,  Covol  received
notification  from the limited  partners of Coaltech that they were  effecting a
retirement  of Covol  as the  general  partner  and  were  terminating  Covol as
operator of the Utah facility. Covol and Coaltech are in negotiations to resolve
the situation,  including a likely settlement of the note and termination of the
Supply and Purchase Agreement.

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

         River Hill. Covol and its subsidiaries,  Commonwealth  Synfuel,  L.L.C.
and Synfuel  Investments,  Inc.,  sold the River Hill facility to DTE River Hill
L.L.C.,  an affiliate of DTE Energy  Services,  Inc., on August 28, 1999.  Covol
also entered into a license and binder supply  agreement which calls for ongoing
royalties  and binder  sales.  The  purchase  price for the River Hill  facility
consisted of a cash payment to Covol of $1,250,000,  assumption of $5,000,000 of
facility  debt,  completion  of  capital  improvements to  the  facility  and an
eight-year royalty arrangement with both Covol and the construction lender, plus
contingent payments based upon facility production performance.

                                       11
<PAGE>

         Carbon Synfuel. Covol and its subsidiaries,  Carbon Synfuel, L.L.C. and
Synfuel  Investments,  Inc.,  sold the Carbon Synfuel  facility to DTE Kentucky,
L.L.C.,  an affiliate of DTE Energy Services,  Inc., on December 31, 1999. Covol
also entered into a license and binder supply  agreement which calls for ongoing
royalties and binder sales.

         In  addition to the four  facilities  discussed  above,  Covol owns two
synthetic  fuel  manufacturing  facilities  that  Covol has for  sale.  They are
referred to as Pocahontas  Synfuel  located near Northfork,  West Virginia;  and
Mountaineer  Synfuel,  near Tallmansville,  West Virginia.  Covol is negotiating
with potential  purchasers for the sale of these two  facilities.  Covol expects
the sales to be  completed  during  the  second  quarter  of fiscal  year  2000.

Proprietary Protection

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

         Trade names:

         Covol  Technologies,  Inc.,  Alabama  Synfuel #1 Ltd.,  Utah Synfuel #1
         Ltd., Carbon Synfuel,  L.L.C.,  Mountaineer Fuels,  L.L.C.,  Pocahontas
         Synfuel, L.L.C., Flat Ridge Corporation, Synfuel Investments, Inc., and
         Engineered Fuel Technologies, Inc.

         Trademarks and Service Marks:

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

         Patents

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

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

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

Confidentiality Provisions

         As  part  of its  business,  Covol  typically  enters  into  agreements
concerning its projects which contain confidentiality  provisions.  Covol is, on
occasion,  required to disclose such  agreements to the  Securities and Exchange
Commission as part of its ongoing  reporting  requirements  under the Securities
Exchange Act of 1934. In addition, disclosure of such agreements may be required
in connection with Covol's SEC registrations or private placement of securities.
Some  of the  agreements  may  not  contain  the  standard  exceptions  for  the
disclosure of

                                       12
<PAGE>

information  which is  required  to be  disclosed  under law.  Consequently,  no
assurances can be given that Covol has not inadvertently  disclosed  information
regarding its various projects in violation of confidentiality covenants entered
into by Covol.

Government Regulation

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

         Compliance with permits,  regulations,  and the approved processes does
not  create  pollution  or  contamination.  Still the  possibility  exists  that
regulatory noncompliance or accidental discharges, in spite of safeguards, could
create an environmental liability.  Acid is the only stored raw material used in
the approved process that is classified as hazardous. Therefore, Covol's and its
licensees'  synthetic fuel operations  entail risk of  environmental  damage and
Covol or its  licensees  may incur  liabilities  in the future  arising from the
discharge of pollutants into the environment or from waste disposal practices.

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

         Covol's  goal is to establish  itself as the  provider of  technologies
that will assist others in the  processing  and  reclamation of their wastes and
by-products,  and Covol  seeks for itself and its  licensees  to avoid  creating
waste streams or compounding  environmental  reclamation problems.  However, the
synthetic fuel manufacturing  process using Covol binder technologies  typically
uses dilute acids.  Covol and its licensees must comply with hazardous  material
handling  and  storage   regulations   related  to  acid  solutions  and  stored
concentrates.

         Covol's and its licensees'  synthetic fuel  operations are also subject
to  federal  and state  safety  and  health  standards.  Covol is  committed  to
providing  effective  management  of worker  safety  and health  protection.  In
addition,  Covol has developed a safety policy  designed to raise and maintain a
high level of safety  awareness by both  management  and  employees.  Failure to
comply with safety and health  standards could have a material adverse affect on
Covol, for example, a regulatory inspector could close the operation until Covol
meets the required standards.

Major Customers

         Approximately  21% of revenues in 1998 and 40% of revenues in 1999 were
from a single licensee, 27% of revenues in 1998 and 15% of revenues in 1999 were
from a second  licensee  and 15% of revenues in 1998 and 13% of revenues in 1999
were from a third licensee.  No other single customer  accounted for over 10% of
total revenues in any year presented.

Competition

         Products  made using the Covol binder  technologies  compete with other
synthetic products as well as traditional source materials.  Competitive factors
include  price,  quality,  delivery  cost and waste  handling  costs.  Covol may
experience  competition  from other  alternative  fuel technology  companies and
their licensees,  particularly those companies with technologies to produce coal
based solid synthetic  fuels.  Competition may come in the form of the licensing
of the competing  technologies  to process coal fines or in the marketing of end
products  qualifying  as  synthetic  fuel.  Competition  includes,  for example,
Krystal Bond, KFx Inc. and Startec Inc. Covol will also  experience  competition
from  traditional  coal and fuel  suppliers  and natural  resource  producers in
addition to those

                                       13
<PAGE>

companies  that  specialize  in the  disposal and  recycling  of waste  products
generated by coal,  coke,  steel and other  resource  production.  Many of these
companies have greater  financial,  management  and other  resources than Covol.
Covol believes that it will be able to compete effectively although there can be
no assurance that it will do so successfully.

Employees

         Covol  and its  subsidiaries  currently  employ 52  persons  full-time.
Twenty-seven of such persons are in corporate administration including research,
development  and  marketing,  and  twenty-five  are in  synthetic  fuel and coal
washing  operations.  None  of  these  employees  are  covered  by a  collective
bargaining agreement.

Forward Looking Statements

         Statements   regarding  Covol's   expectations  as  to  the  financing,
development,  construction, operation and sale of facilities utilizing the Covol
binder technologies,  the marketing of products,  the receipt of licensing fees,
the ability to extend or refinance existing  obligations,  and other information
presented in this Annual  Report on Form 10-K that are not purely  historical by
nature,  including those statements regarding Covol's future business plans, the
operation of facilities,  the estimated capacity of facilities, the availability
of coal fines, the  marketability of the synthetic fuel and other briquettes and
the financial viability of the facilities, constitute forward looking statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
Although  Covol  believes  that  its   expectations   are  based  on  reasonable
assumptions  within the bounds of its knowledge of its business and  operations,
there can be no assurance  that actual results will not differ  materially  from
its expectations.  In addition to matters affecting Covol's industry or the coal
industry or the economy  generally,  factors which could cause actual results to
differ from  expectations  stated in these forward looking  statements  include,
among others, the following:

         (1)      The commercial success of the Covol binder technologies.

         (2)      Successful sale of Covol owned facilities.

         (3)      Operating  issues  for  licensed  and Covol  owned  facilities
                  including  feedstock   availability,   moisture  content,  Btu
                  content,    correct   application   of   binder   formulation,
                  operability of equipment,  product  durability,  resistance to
                  water absorption and overall costs of operations.

         (4)      Marketing  issues  relating to market  acceptance  of products
                  manufactured  using Covol's  technology,  including control of
                  moisture content,  hardness, special handling requirements and
                  other  characteristics  of the  synthetic  fuel product  which
                  affect its marketability and its sales price.

         (5)      Securing  of  necessary  sites,   including  permits  and  raw
                  materials, for relocation and operation of facilities.

         (6)      Maintenance of placed in service requirements under Section 29
                  of the tax code by synthetic fuel manufacturing facilities.

         (7)      Ability  to  obtain   needed   additional   capital  on  terms
                  acceptable to Covol.

         (8)      Changes in governmental  regulations or failure to comply with
                  existing regulations which may result in operational shutdowns
                  of Covol or licensee facilities.

         (9)      The  availability  of tax credits  under Section 29 of the tax
                  code.

         (10)     The commercial  feasibility  of the Covol binder  technologies
                  upon the expiration of Section 29 tax credits.

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

         (12)     Ability  to  meet  non-financial  commitments  under  existing
                  contractual  arrangements,  including  requirements  to obtain
                  stockholder approval of certain transactions.

         (13)     Ability to commercialize the non-synthetic  fuel related Covol
                  binder  technologies  which  have  only  been  tested  in  the
                  laboratory and not in full-scale operations.

         (14)     Dependence on licensees to successfully implement Covol binder
                  technologies.

         (15)     The market  acceptance  of  products  manufactured  with Covol
                  binder   technologies   in  the  face  of   competition   from
                  traditional products.

         (16)     Ability to produce  products  with Covol  binder  technologies
                  with   acceptable   hardness,   moisture   level,   and  other
                  characteristics.

         (17)     Success  in  the  face  of  competition  by  others  producing
                  synthetic fuel and other recycled products.

         (18)     Sufficiency of intellectual property protections.

ITEM 2. PROPERTIES

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

         In October 1997,  Covol purchased an 8,000  square-foot site located in
Price,  Utah,  on which  Covol's  prototype  briquetting  plant is located,  for
$150,000.  Included in the purchase was a 1,400 square-foot office and warehouse
building which houses  equipment.  The property is subject to a 10-year $100,000
mortgage held by the seller.  The property is currently  being leased to a third
party for a one-year term.

         In June 1996, Covol entered into a land lease of approximately 12 acres
in Price,  Utah with a  non-affiliated  party at a monthly  rental of $600.  The
lease term  commenced  on June 20, 1996 and expires on December 31, 2007 but may
be extended.  In 1996 Covol constructed a 22,000  square-foot  building to house
the Utah  Synfuel #1 facility.  In March 1997,  this  building was  subleased by
Covol to Coaltech as part of the sale of the Utah Synfuel #1 facility. Covol has
constructed an ancillary building, a 1,650 square-foot binder plant.

         In February 1997, Covol entered into a lease agreement with Earthco for
two contiguous parcels located in Wellington,  Utah  (approximately 6 miles from
the Utah Synfuel #1 site).  The first parcel covers  approximately  30 acres and
has a lease  term  of 15  years.  On  this  parcel,  Covol  constructed  a 3,400
square-foot wash plant at a cost of approximately $8 million.  The second parcel
covers  approximately  357  acres  and has a lease  term of 5 years.  The  lease
permits Covol to conduct fines recovery operations. The lease provides for total
obligations  to  lease  the  parcels  and  acquire  the   associated   fines  of
approximately  $5.5  million,  of which  $700,000  was paid at the time of lease
execution  and for payments 4 times each year until May of 2002 for the balance.
However,  Earthco's  ownership rights, and in turn, Covol's leasehold rights are
the subject of a lawsuit  initiated by NEICO. See "ITEM 3. LEGAL  PROCEEDINGS --
NEICO/Earthco Suit" for a discussion of the dispute.

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

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

         In May 1998,  Covol entered into a 10 year,  $1,000 per year lease with
Upshur Property,  Inc., for approximately 10 acres of property in Tallmansville,
Upshur  County,  West  Virginia.  The  property  is the site of the  Mountaineer
Synfuel  facility.  The lease has been terminated and the facility is being sold
and relocated.

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

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

ITEM 3. LEGAL PROCEEDINGS

         Asbestos  Investigation.  In January  1996, a manager of Covol  entered
property owned by Nevada  Electric  Investment  Company,  a subsidiary of Nevada
Power Corporation, in connection with an offer by Covol to purchase

                                       14
<PAGE>

the property,  and with certain other employees of Covol,  removed some asbestos
over a two-day  period.  In May of 1996 Covol received a notice of violation and
order for compliance  from the State of Utah,  Division of Air Quality  alleging
that asbestos was improperly handled,  removed,  and disposed of. Covol complied
with the order and in September of 1996 entered into a settlement agreement with
the  State of Utah and paid a fine in the  amount of  $11,000.  In late 1997 the
U.S. Environmental Protection Agency began its own investigation,  referring the
matter to the U.S.  Attorney's  office.  In  December  1999 the  former  manager
entered  into a  misdemeanor  plea  bargain  and the U.S.  Attorney  agreed that
criminal matters arising out of the incident are at an end.

         NEICO/Earthco Suit. On February 21, 1997, Covol entered into a contract
on a parcel of real property  located near Price,  Utah, in which Covol obtained
certain  possessory  and related  interests,  Covol's  primary  purpose being to
obtain a source of coal fines to serve as feedstock for a nearby  synthetic fuel
facility.  On August  24,  1999,  Covol  sent a notice of  default  to  Earthco,
alleging that Earthco had breached a material  provision of the contract because
Earthco did not have title to the  property.  Covol refused to tender its August
21, 1999 payment because of Earthco's breach.  In addition,  Covol contends that
the quantity  and/or quality of recoverable  coal fines was  substantially  less
than what Covol had understood when entering into the contract, thereby creating
grounds to reform the terms of the contract. Earthco subsequently countered with
allegations  that  Covol  has  breached  its  obligations  under  the  contract,
including failure to make the August 21, 1999 payment.

         On November 1, 1999,  Covol was served with a Complaint  in  litigation
pending in the Seventh  Judicial  District Court of Carbon  County,  Utah styled
Nevada  Electric  Investment  Company v. Earthco,  et al. In the Complaint,  and
consistent with Covol's position,  Nevada Electric  Investment Company ("NEICO")
alleges  that it is the  lawful  owner of the  property  near  Wellington,  Utah
described in Covol's  lease from Earthco.  NEICO seeks a  declaratory  judgement
that Covol is not  entitled to  possession  of the  property  due to the lack of
ownership by Earthco. The Complaint also seeks further relief from Earthco.

         Covol received  Earthco's  Answer,  Counterclaims and Cross-claim dated
December  16,  1999.  Earthco's  cross-claim  against  Covol  alleged  breach of
contract and prayed for  substantial  damages in an amount to be proven at trial
but alleged to be in excess of $5 million. Covol filed its Reply and Cross-claim
against Earthco on January 7, 2000 denying Earthco's claims and asserting claims
of misrepresentation, breach of lease, unjust enrichment, and related claims and
for general and consequential damages in an amount to be proven at trial.

         The disputes  among Covol,  Earthco and NEICO are at an early stage and
resolution is uncertain.  Covol intends to defend  against  claims and prosecute
its own claims vigorously.

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

         None.

                  [Remainder of Page Intentionally Left Blank]

                                       15
<PAGE>

                                     PART II

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

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

         The following table sets forth, for the periods presented, the high and
low  trading  prices of Covol's  common  stock as  reported by Nasdaq from April
1998, to September  1999, and bid  quotations as reported by National  Quotation
Bureau, Inc. from October 1997 through March 1998. The quotations do not reflect
adjustments  for  retail  mark-ups,   mark-downs  or  commissions  and  may  not
necessarily  represent  actual  transactions.  Since  Covol has  several  market
makers,  the bid prices among the different  market makers will generally  vary.
Accordingly,  the bid price may not be  representative  of  actual  trades.  The
following prices may not be considered valid  indications of market value due to
the limited and sporadic  trading in the shares of common  stock during  certain
periods.

                                                     Low         High
Fiscal 1998

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

Fiscal 1999

Quarter ended December 31, 1998                    $4.25        $9.38
Quarter ended March 31, 1999                        4.13         8.13
Quarter ended June 30, 1999                         3.25         7.00
Quarter ended September 30, 1999                    2.50         6.06



         As of January 4, 2000,  there were  approximately  511  shareholders of
record of Covol's common stock.

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

Recent Sales of Unregistered Securities

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

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

         Covol believes that the following  issuances of shares of common stock,
notes,  debentures  and  other  securities  were  exempt  from the  registration
requirements  of the  Securities  Act  of  1933,  as  amended,  pursuant  to the
exemption set forth in Section 4(2) thereof. Each security was issued subject to
transfer  restrictions.  Each  certificate  for each security bears a restricted
legend. Each investor made representations to Covol that it was

                                       16
<PAGE>

accredited  as that term is defined in  Regulation  D and that the  security was
acquired  for  investment   purposes.   However,   Covol  has  effective   three
registration  statements filed on form S-3. These  registration  statements have
registered many of the securities described in this section.

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

         As of November 10, 1998, all of the limited partners in Utah Synfuel #1
and all but one of the  limited  partners  in  Alabama  Synfuel #1 had agreed to
exchange their limited partnership interests for shares of Covol's common stock,
and  accordingly  Utah Synfuel #1 became a wholly-owned  subsidiary of Covol. In
November  1999 the last  limited  partner in Alabama  Synfuel #1  exchanged  its
limited partnership  interest as a part of a licensing agreement so that Alabama
Synfuel #1 also became a wholly-owned subsidiary of Covol.

         During  November 1998,  Covol  completed a financing  transaction  that
consisted of $400,000 of debt and  approximately  $3,500,000 of equity issued to
28 investors.  The debt had a term of twelve  months,  bears interest at 15% per
annum,  with an interest  only payment due in six months and with the balance of
interest and principal due at maturity.  The debt is  collateralized  by certain
assets of Covol and is due prior to maturity  upon the  placement  of  long-term
financing by Covol. The equity transaction  consisted of the sale of a unit at a
price of $5.00.  A unit  consisted  of one share of  restricted  common stock of
Covol plus a warrant to purchase one additional share of restricted common stock
at an  exercise  price of  $7.50.  The  warrants  expire  June  30,  2000 if not
exercised.  The stock and shares issuable  pursuant to the related warrants bear
"piggyback" registration rights.

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

o        Dividends on the preferred  stock are  cumulative and accrue whether or
         not they have been  declared  or  whether  Covol has any  profits.  The
         dividend  rate is 7% per year of the  liquidation  value of $1,000  per
         share.

o        The preferred  stock is  convertible  into common shares in incremental
         stages beginning April 1999 through July 1999, at which time all of the
         outstanding  shares became  convertible to common stock.  The number of
         common  shares  to  be  received  upon   conversion  is  determined  by
         multiplying the number of preferred  shares by $1,000 and dividing that
         number by the conversion price (originally $5.50 per share,  subject to
         market adjustment).  Upon conversion,  all accrued and unpaid dividends
         are paid or converted into shares of common stock.

o        Covol  may  at  its  option  redeem  the  outstanding  preferred  stock
         beginning  July  1999  for a  redemption  price  equal  to  125% of the
         liquidation value plus any accrued and unpaid dividends thereon.

         Warrants for the purchase of 72,727  shares of common stock were issued
in conjunction  with this preferred  stock.  The warrants are  exercisable  from
April  1999  through  July 2001 at an  exercise  price of $6.88 per  share.  The
warrants  issued and  changes  made to other  existing  warrants  were valued at
approximately $500,000. The exercise deadline for certain other warrants with an
exercise price of $7.00 per share held by the shareholder  were extended to June
2000 and certain additional  warrants with an exercise price of $30.00 per share
were  relinquished  and  canceled.  Covol  granted  registration  rights for the
restricted common shares issuable upon conversion of the

                                       17
<PAGE>

preferred stock or upon exercise of the common stock  warrants.  Through January
4, 2000, all of the series C preferred stock had been  converted.  Approximately
237,000 shares of common stock were issued on conversion of the preferred  stock
and related accrued but unpaid dividends.

         On March 17, 1999, Covol completed a financing transaction with a large
investment  fund. The financing  consisted of the issuance of  $20,000,000  face
value of convertible secured debt, issued at a 50% discount, and the issuance of
60,000  shares  of  cumulative   convertible  preferred  stock  (series  D)  for
$6,000,000,  for total gross proceeds of $16,000,000.  Warrants for the purchase
of common  stock were also  issued as part of the  financing  and were valued at
approximately  $3,000,000.  Net  cash  proceeds  were  used to  retire  maturing
short-term debt and related accrued interest, for working capital uses and other
general corporate purposes.  This transaction is described in detail in the Form
8-K filed March 24, 1999 and in the Form 10-Q/A for the  quarterly  period ended
March 31, 1999.  Beginning in November 1999 and through  January 4, 2000,  Covol
has issued  1,603,775  shares of common stock on  conversion of 15,202 shares of
series D preferred stock.

         In September 1999,  Covol entered into a transaction  with an affiliate
of a major  shareholder  and lender to Covol,  to provide  financing of up to $4
million in the form of  convertible  secured debt.  The  agreement  provides for
Covol to make draws as needed.  Covol received  $850,000 at the time of closing,
less a placement  fee of 10%, and  subsequent  to September  30, 1999 received a
total of  $1,650,000,  less a placement fee of 10%. The debt is  convertible  at
$3.00 per share, or market, whichever is less, and is convertible at the rate of
25% every 30 days beginning 30 days from the date of closing, subject to certain
restrictions.  Covol can redeem all  outstanding  debt at a rate of 125% of face
value by  providing  30 days notice.  Borrowings  are due in March 2001,  if not
converted  earlier,  and interest payments are due quarterly  beginning December
1999. Covol assigned the royalties to be received from a licensed synthetic fuel
facility as  collateral  for the  financing.  In  November  and  December  1999,
approximately  2,532,000  shares of common  stock were issued on  conversion  of
$1,460,000 of the convertible debt.

         The  agreement  requires  the  issuance of  warrants to purchase  Covol
shares  equal to 40% of the  shares  issuable  under any  borrowings  under this
financing  arrangement.  The warrants have a three-year  exercise  period and an
exercise  price of $3.60 per  share.  Warrants  for the  purchase  of a total of
approximately  350,000  shares of common  stock were issued and were  assigned a
value,  using  the  Black-Scholes   option  valuation  model,  of  approximately
$477,000.

         In December 1999, Covol placed $1,500,000 of financing with an investor
rather than  drawing  the entire  $4,000,000  of funding as  provided  under the
September financing arrangement.  The terms and conditions of this financing are
similar to the September financing.  As of December 20, 1999, Covol had received
a total of  $1,500,000,  less a placement fee of 10%. The debt is convertible at
$.73 per share,  the market price at closing,  or market price on the conversion
date, whichever is less. The debt is convertible after January 21, 2000.

         The  agreement  requires  the  issuance of  warrants to purchase  Covol
shares equal to 40% of the shares  issuable under the debt  agreement.  Warrants
for the purchase of approximately  935,000 shares were issued. The warrants have
a three-year  exercise period and an exercise price of $.88 per share,  and were
assigned  a  value,   using  the   Black-Scholes   option  valuation  model,  of
approximately $269,000.

                                       18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

         The following selected financial data are derived from the consolidated
financial  statements of Covol.  This information  should be read in conjunction
with the consolidated  financial  statements,  related notes and other financial
information included herein. In 1996, Covol sold its construction  subsidiaries.
All construction - related operations were reflected as discontinued  operations
in the 1995 and 1996 financial statements. The note receivable received by Covol
as  consideration  for the sale is "marked to market" each quarter  based on the
market value of Covol's stock held as collateral,  and the resulting adjustments
are reflected in Covol's statement of operations. The selected financial data as
of and for the years ended  September  30, 1995 and 1996 and as of September 30,
1997 are derived from audited  financial  statements  not included  herein.  The
selected financial data for the year ended September 30, 1997, and as of and for
the years ended  September  30, 1998 and 1999 were  derived  from the  financial
statements  of Covol  which  have been  audited  by  PricewaterhouseCoopers  LLP
included elsewhere herein.
<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                ---------------------------------------------------------------------
(thousands of dollars, except per-share data)        1995           1996           1997            1998          1999
----------------------------------------------- -------------- --------------  -------------  -------------- ------------
OPERATING DATA:
<S>                                                  <C>          <C>            <C>               <C>          <C>
     Total revenues                                  $     129    $       295    $       147       $   3,074    $   6,719
     Loss from continuing operations                   (4,524)       (12,955)       (10,498)        (11,308)     (28,393)
     Net loss                                          (5,654)       (13,836)       (10,498)        (11,308)     (28,393)
     Basic and diluted net loss per
           common share:
         Loss per share from continuing
              operations                                (1.00)         (1.86)         (1.32)          (1.17)       (2.39)
         Net loss per share                             (1.25)         (1.99)         (1.32)          (1.17)       (2.39)
     Purchase of property, plant and
          equipment and facilities
          held for sale                                    694          5,055          7,194          36,963          861


                                                                                September 30,
                                                 --------------  --------------  ----------------------------------------
(thousands of dollars)                                1995            1996            1997         1998          1999
------------------------------------------------ --------------  --------------  -------------- -----------  ------------
BALANCE SHEET DATA:
<S>                                                   <C>            <C>             <C>          <C>          <C>
     Working capital (deficit)                            $(480)        $(3,482)        $(3,471)    $ 7,497       $(2,037)
     Net property, plant and equipment                    1,330           7,125          13,619      15,809        14,182
     Total assets                                         2,660           8,072          26,590      68,061        58,095
     Long-term obligations                                  177             364           5,362      23,256        30,138
     Total stockholders' equity (deficit)                 1,183            (233)          6,426      14,746        (1,028)
</TABLE>

                                       19
<PAGE>

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

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

Year Ended September 30, 1999 Compared to Year Ended September 30, 1998

         The information set forth below compares Covol's  operating results for
1999 with its operating results for 1998.

         Revenues. Total revenues for the year ended September 30, 1999 ("1999")
increased by $3,645,000  to  $6,719,000  as compared to $3,074,000  for the year
ended September 30, 1998 ("1998").  During 1999, Covol  recognized  license fees
totaling  $3,526,000 while $860,000 of license fees were recognized during 1998.
The license fees in 1999 consisted of the straight-line amortization of one-time
non-refundable  initial  license fees of $875,000 and recurring  earned  license
fees or royalty  payments of  $2,651,000.  License fees in 1998 consisted of the
straight-line  amortization of one-time  non-refundable  initial license fees of
$654,000 and  recurring  license fees or royalty  payments of $206,000.  Initial
license fees, which are not expected to increase in future periods, are normally
received when construction of the related  synthetic fuel facility begins,  when
construction  is  completed,  or when certain  construction  milestones or other
conditions are met, but are recognized on a straight-line  basis over the period
covered by Covol's license  agreements with licensees.  Recurring earned license
fees or royalty payments,  which are expected to increase in future periods, are
due quarterly  based upon  synthetic fuel produced and sold as reported to Covol
by its licensees.

         Synthetic  fuel sales were $767,000 in 1999 compared to $32,000 in 1998
and represent the sale of product from Covol-owned  facilities.  This revenue is
expected  to decrease  in the future as Covol  sells the  remaining  Covol-owned
facilities.  One facility was sold in September 1999,  another facility was sold
in December 1999 and Covol expects to sell its two remaining owned facilities in
early 2000.  Covol sold six binder  mixing  plants to licensees  during 1998 for
$1,088,000,  generating a gross profit of $200,000.  There were no such sales of
binder  mixing  plants  during 1999 nor are any  expected  in the future.  Covol
provides binder material to its licensees  either at a fixed price or at Covol's
cost plus a contracted  markup.  Covol  purchases the binder  materials  under a
long-term contract with a large chemical company. Total binder sales during 1999
were $2,140,000 with a corresponding  direct cost to Covol of $1,695,000.  Total
binder sales during 1998 were $994,000 with a corresponding direct cost to Covol
of $642,000.  Covol expects a significant  increase during 2000 of production of
synthetic fuel by its licensees as licensees move toward full production  levels
with a  corresponding  increase in earned  license fees or royalty  payments and
sales of binder  products.  However,  Covol cannot  assure  increases in license
fees,  royalty  payments  and  binder  sales as the  primary  factor is  Covol's
licensees ability to successfully obtain adequate feedstock coal fines,  process
fines into synthetic fuel, and develop markets for synthetic fuel now and in the
future.  Covol  believes that its licensees  have made  significant  progress in
these areas during 1999 but continued success cannot be assured.

         Synthetic  fuel is a relatively  new product and competes with standard
coal products.  Industrial  coal users must be satisfied that the synthetic fuel
is a suitable substitute for standard coal products. Moisture content, hardness,
special handling  requirements and other  characteristics  of the synthetic fuel
product may affect its  marketability  and its sales price. Many industrial coal
users are also limited in the amount of synthetic fuel product they can purchase
because  they have  committed  to purchase a  substantial  portion of their coal
requirements through long-term coal contracts already in place. Reliance on spot
markets and the overall  downward trend in coal prices have  generally  produced
lower sales prices as compared to long-term coal supply  contracts common in the
utility  industry.  Market  acceptance of the synthetic fuel product  appears to
have improved during 1999 even though Covol's owned facilities and its licensees
have  only  been  able to  secure  long-term  contracts  for the sale of a small
portion  of  their  production.  The  suitability  of  synthetic  fuel as a coal
substitute,  particularly the quality characteristics of synthetic fuel, and the
traditional  long-term  supply contract  practices of fuel buying in the utility
industry,   have  made  the  identification  of  purchasers  of  synthetic  fuel
difficult.  Covol has tried to solve this problem by identifying  buyers for its
owned  facilities  that  are  either  consumers  of coal or who have  access  to
long-term coal

                                       20
<PAGE>

contracts.  Synthetic fuel is a coal  substitute and the market and price are as
broad and varied as the coal  market  itself.  The US coal  market  exceeds  one
billion tons annually,  and the prices range from  approximately  $12 to $35 per
ton in the areas where facilities using the Covol technology are located. Prices
are dependent on many factors,  including Btu content,  ash and sulfur  content,
moisture,  location,  etc.  Covol  believes that initial  market  resistance for
synthetic fuel has decreased and believes long-term contracts can now be secured
allowing  Covol and its licensees to market the synthetic they produce at prices
similar to coal.

         Section 29 of the Internal  Revenue Code  provides a tax credit for the
production and sale of qualified  synthetic  fuel.  Covol and Covol's  licensees
have  received  numerous  private  letter  rulings from the IRS in which the IRS
agrees that synthetic fuel manufactured using Covol's  technology  qualifies for
the  Section 29 tax  credits.  Covol is aware of at least eight  private  letter
rulings issued by the IRS that cover Covol's technology. Based upon the language
of Section 29 and private  letter rulings issued by the IRS to Covol and Covol's
licensees, Covol believes the synthetic fuel facilities were built and completed
by June 30, 1998 and are therefore eligible for Section 29 tax credits. See ITEM
1. BUSINESS - Tax Credits for an  explanation of  qualifications  for Section 29
tax credits.

         The  synthetic  fuel  facilities  that  qualify for tax  credits  under
Section 29 of the tax code  receive  economic  benefits  from the tax credits in
addition to the benefits from  operations.  It is possible that  synthetic  fuel
facilities built after June 30, 1998 that are not eligible for tax credits could
not be operated profitably.  Section 29 expires on December 31, 2007 after which
tax credits will not be available to the synthetic fuel facilities.  In order to
remain  competitive and commercially  viable after 2007, Covol and its licensees
must manage their costs of production and  feedstock,  and must also develop the
market for synthetic  fuel with prices  comparable to coal.  Covol has developed
and patented  technologies  related to the briquetting of wastes and by-products
from the coal,  coke and steel  industries and has also tested in the laboratory
the  briquetting  of  other  materials.   However,   to  date,  Covol  has  only
commercialized the coal-based synthetic fuel application. The other applications
have not been commercialized or proven out in full-scale  operations.  The level
of success Covol has in  commercializing  these other applications will directly
impact Covol's future  success and its ability to expand  operations  beyond the
coal applications.

         Our accounting and valuation  procedures  assume all of the Covol owned
facilities  qualify for section 29 tax credits so that synthetic fuel production
will continue to be the highest and best use of our equipment and facilities. If
the  facilities  lost their  qualification  under  Section 29, the equipment and
facilities'  carrying  value would likely be higher than the fair value based on
the alternative highest and best use, which could result in an impairment charge
at that time.

         Operating Costs and Expenses. Operating costs and expenses increased by
$16,444,000 or 130% to  $29,132,000  during 1999 from  $12,688,000  during 1998.
Cost of coal briquetting  operations increased $7,391,000 from $5,565,000 during
1998 to  $12,956,000  during 1999.  During 1999,  Covol  incurred  significantly
higher  operating  expenses in  connection  with the  continued  refinement  and
implementation  of the briquetting  process in connection with the 24 facilities
placed in service during 1998, and in particular the operating costs of the four
facilities  owned  by Covol  which  are  being  held for  sale.  These  expenses
primarily  related to labor and operating  expenses at the four Covol  synthetic
fuel  facilities  and the wash  plant  located  in Utah,  losses  related to the
writedown of inventory purchased from Coaltech,  and costs incurred in providing
assistance to Covol's  licensees in resolving  ramp-up issues at their synthetic
fuel facilities.  Covol expects to continue incurring operating losses into 2000
until all of these facilities are sold. Covol expects to realize a gain when the
facilities are sold and would expect the cost of coal briquetting  operations to
be reduced to a level significantly less than the 1998 level.

         Until October 1999, Covol operated one of the synthetic fuel facilities
for Coaltech,  a partnership for which Covol was the general partner.  Under the
operating  agreement,  Covol is  contractually  obligated to purchase all of the
synthetic  fuel produced at cost plus $1 per ton.  Production of synthetic  fuel
from this facility during 1999 and 1998 was not significant and accordingly, the
cost per ton was  significantly  in excess of the current  market  value.  These
costs and the corresponding write-down of this inventory to its market value are
included  in the  cost  of  coal  briquetting  operations.  The  write-down  was
approximately  $1,815,000 during 1999 and $1,400,000 during 1998. Covol operated
the  Coaltech  Utah  facility  at a loss  because of the need to gain  operating
experience (it was the first  synthetic fuel facility Covol built and operated),
test alternative production methods,  maintain operational status for Section 29
qualification, maintain the relationship with AJ Gallagher, an owner of the Utah
facility who is

                                       21
<PAGE>

a major  licensee  and partner of Covol,  and other  related  business  reasons.
Subsequent to September 30, 1999, Covol received  notification  from the limited
partners  of Coaltech  that they were  effecting  a  retirement  of Covol as the
general  partner and were  terminating  Covol as operator of the Utah  facility.
Covol and Coaltech are in  negotiations  to resolve the  situation,  including a
likely  settlement  of the note  and  termination  of the  supply  and  purchase
agreement.  Settlement  payments  are  expected to be  consistent  with  amounts
reflected in the accompanying  consolidated financial statements.  Proceeds from
this  settlement  will be used to repay the $4,313,000  note payable due January
2000 to one of the  limited  partners.  It is also  expected  that  the  limited
partners will continue to purchase  binder  materials from Covol and use Covol's
technology  in the  production  of synthetic  fuel when  operations  of the Utah
facility are resumed.

         Asset Write-offs and Other  Non-recurring  Charges.  In May 1995, Covol
entered  into an  agreement  with  Geneva  Steel  Company to build and operate a
synthetic  fuel  briquetting  facility.  The facility  never reached  commercial
operating levels, but was held for other uses, including potential relocation to
another  site  for  use  in  the  production  of  synthetic  fuel  or  in  other
applications.  In early 1999, Geneva filed a voluntary petition for relief under
Chapter  11 of the United  States  Bankruptcy  Code due to a lack of  sufficient
liquidity.  Primarily  as a result  of this  event,  Covol  moved a  substantial
portion of the equipment comprising the facility from the Geneva site to another
location  where  it  is  being  used  in  a  different  application  of  Covol's
technology. Certain assets at the Geneva site, primarily consisting of leasehold
improvements on the property where the facility was located, were abandoned. The
carrying value of these assets, totaling approximately $556,000, was written off
during 1999.

         During 1997, Covol entered into an agreement to purchase coal fines for
feedstock  for a  synthetic  fuel  facility  in  Utah.  Beginning  in  1997  and
continuing  through  May  1999,  Covol  made  payments  totaling   approximately
$3,917,000,  of  which  $240,000  was  transferred  to cost of coal  briquetting
operations.  The net  amount  paid was  recorded  as  advances  on  inventories.
Quarterly  payments of approximately  $396,000 are required under the agreement.
The agreement  provides for total payments of $5,500,000  between  February 1997
and May 2000 for the  removal  of 2  million  tons of coal  fines (at a price of
$2.75 per ton) from the property.  The agreement also provides for removal of an
additional  500,000 tons at $2.75 per ton. No payment is required for removal of
any coal fines in excess of 2.5 million  tons.  Covol  entered into the contract
based on its understanding  that the other party to the agreement (the "Seller")
was the owner of the property and that there were in excess of 2 million tons of
recoverable coal fines on the property. Subsequently, Covol learned that a third
party disputes that the Seller is the owner of the property,  and that there may
be substantially  less than 2 million tons of recoverable fines on the property.
Consequently,  in August 1999,  Covol notified the Seller that unless the Seller
could  procure and provide  evidence that it could warrant title to the property
and would adjust contract  payments to reflect the actual  recoverable  fines at
the  property,  Covol may elect to terminate  the contract and seek  appropriate
damages.  On this basis, Covol has refused to make further quarterly payments to
the Seller under the contract.  The Seller  responded by denying  Covol's claims
and  alleging  issues of property  reclamation  and bonding and failed  contract
payment.  Covol  denies  these  allegations.  Covol  no  longer  has  purchasing
responsibilities  for the  facility  as the  owner  has  notified  Covol  of its
intention  to  relocate  the  facility.  The  dispute  is in an  early  stage of
litigation and resolution is uncertain.  See "ITEM 3. LEGAL PROCEEDINGS".  Based
on the uncertainty of recovering the net advances paid through litigation, Covol
wrote off the entire $3,677,000 of advances on inventories in the fourth quarter
of 1999.

         In addition to the above  charges,  in the fourth quarter of 1999 Covol
wrote off a $660,000 note receivable and recorded a liability for  approximately
$469,000  related to a  settlement  agreement  with a company  that had provided
Covol with advise with respect to the use of certain  synthetic fuel technology,
certain financing obtained, and the sale of certain synthetic fuel manufacturing
facilities.

         These  write-offs  and the  settlement  provision  total  approximately
$5,362,000, which amount is recorded as asset write-offs and other non-recurring
charges in the consolidated statement of operations.

         Selling,  general and administrative  expenses increased $291,000 or 7%
to $4,727,000  during 1999 from  $4,436,000 for 1998. The largest  components of
selling,  general  and  administrative  expenses  for both  1999  and 1998  were
payroll,  professional  services and travel  expenses.  Payroll costs  increased
approximately  $450,000,  due primarily to increased headcount and salary costs,
professional  services  increased  approximately  $20,000  and travel  decreased
approximately $50,000 from 1998 to 1999. Also, there was approximately  $250,000
of  commissions  incurred in  connection  with the  placement of synthetic  fuel
license agreements in 1998 while there were no such commissions in 1999. Changes
in the other categories from year to year were not material.

         Compensation expense from stock options,  stock warrants,  and issuance
of common stock increased

                                       22
<PAGE>

$1,614,000 to $2,553,000 for 1999 from $939,000 for 1998.  This expense  relates
to  options  granted  in prior  periods  that  vest over  several  years and the
compensation  value  that is being  recognized  as an expense  over the  vesting
period.  During 1999, Covol terminated  several  employees to whom  compensatory
stock  options  were  granted  in prior  years.  These  stock  options  were not
forfeited  upon  termination,  resulting  in the  write  off of the  unamortized
deferred compensation related to these individuals.

         Loss on sale of facility. In 1998, Covol sold a synthetic fuel facility
located in Alabama on which a loss of $218,000 was  recognized.  In 1999,  Covol
sold a  facility  located  in  Pennsylvania  on  which a loss  of  approximately
$1,839,000 was recognized.  The sales price on the 1999 transaction consisted of
a cash payment to Covol of  $1,250,000,  assumption  of  $5,000,000  of facility
debt,  completion  of capital  improvements  to the facility  and an  eight-year
royalty  arrangement  with both  Covol and the  construction  lender.  Covol can
receive  additional cash payments in the form of both  accelerated and increased
royalties upon obtaining firm synthetic fuel "off-take"  agreements in excess of
100,000 tons per year and operating the facility at rated capacity for a ten-day
period.  Covol must achieve these  performance  milestones by June 30, 2000. The
maximum amount under these provisions of approximately $9,700,000 is achieved if
"off-take"  agreements  to sell  360,000  tons per year are put in place for the
synthetic fuel production of the facility in addition to the ten-day  operations
period.  Further,  Covol can  receive an  additional  $4,000,000  payment if the
facility  operates  at  115%  of  capacity  for  a  three-month  period  in  any
consecutive  three  months  prior to December  31,  2001.  Covol will  recognize
revenue and a corresponding  gain under the royalty  arrangement upon receipt of
the royalty payments and for achievement of performance  milestones.  Covol also
sold a synthetic fuel facility in December 1999, and entered into  agreements to
sell two other facilities in January 2000, as more fully described in Note 17 to
the consolidated financial statements.

         Other Income and Expense.  During 1999, Covol had net other expenses of
$5,980,000  compared to $1,694,000 for 1998. This increase of $4,286,000 relates
primarily to an increase in interest  expense of  $3,508,000,  a change  between
periods of $1,228,000 in the mark-to-market  adjustment of the carrying value of
the related party note receivable collateralized by common stock, and a decrease
in  minority  interest  in  losses of  consolidated  subsidiaries  of  $401,000,
partially offset by an increase in interest income of $1,006,000.

         Interest  expense  in  1998  of  $2,745,000   consisted   primarily  of
amortization of the discount  incurred upon the issuance of convertible debt and
warrants at a discount.  Interest  expense of  $6,253,000  in 1999  consisted of
interest  accrued on notes payable used to finance the construction of synthetic
fuel  facilities  held  for sale  and for  operating  needs  and  $2,075,000  of
amortization  of debt  discount  and debt  issue  costs.  Interest  expense  has
increased  significantly  as a result  of the debt  issued  during  March  1999.
Interest  expense  will  decrease as a result of any future  repayments  of debt
related to the sale of facilities held for sale.

         During 1996, Covol sold certain construction  companies and received as
consideration  a $5,000,000  note  receivable  ("Note").  The Note is "marked to
market" each quarter based upon the market value of Covol's common stock held as
collateral and is reflected in the consolidated  balance sheet at the underlying
value of this  collateral,  $400,000 at  September  30,  1999.  This  adjustment
resulted in a write-down  of $1,209,000  during 1999,  compared to a write-up of
$19,000 during 1998 for a net change of $1,228,000.  A $515,000  payment on this
Note during 1999 was  included  in interest  income for 1999,  while no interest
income on the Note was  recognized in 1998.  Another  reason for the increase in
interest  income in 1999 over  1998  relates  to a full  year's  interest  being
recognized  on the  $6,500,000  note  receivable  from the  sale of the  Alabama
facility in March 1998.

         During  September  1998,  Covol  offered the  limited  partners of Utah
Synfuel #1 and Alabama  Synfuel #1 common  stock of Covol in exchange  for their
limited partnership interests. These exchanges, most of which were accounted for
in September 1998, were substantially  completed by November 1998, at which time
Utah Synfuel #1 became a wholly-owned subsidiary of Covol and Alabama Synfuel #1
became a 98%-owned subsidiary of Covol. As a result of these exchanges, minority
interest in the losses of consolidated subsidiaries decreased from approximately
$392,000 in 1998 to approximately $0 in 1999.

         Net loss. For 1999, the net loss of $28,393,000  represents a change of
$17,085,000  from the net loss of $11,308,000 in 1998.  This is primarily due to
the increase in cost of briquetting  operations,  the asset write-offs and other
non-recurring  charges,  and the  increase  in interest  expense.  Covol did not
recognize any income tax benefit in

                                       23
<PAGE>

1999 or 1998 since the  realization  of its deferred tax asset of  approximately
$21,800,000,  consisting  primarily  of net  operating  loss  carryforwards,  is
dependent on generation of future taxable income.

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

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

         Revenues.  Total  revenues  for  the  year  ended  September  30,  1998
increased by $2,927,000  to $3,074,000 as compared to $147,000 for 1997.  During
1998 Covol recognized  license fees totaling  $860,000 while $105,000 of license
fees were  recognized  during 1997.  These fees  consisted of the  straight-line
amortization of one-time  non-refundable  initial license fees of $654,000,  and
recurring license fees or royalty payments of $206,000. The fees in 1997 related
solely to  amortization  of the  Coaltech  non-refundable  initial  license fee.
Initial  license fees are normally  received  when  construction  of the related
synthetic fuel facility begins, when construction is completed,  or when certain
construction  milestones or other  conditions  are met, but are  recognized on a
straight-line  basis over the period covered by Covol's license  agreements with
licensees.  Recurring  license fees or royalty  payments are due quarterly based
upon  synthetic  fuel  produced and sold as reported to Covol by its  licensees.
Covol sold six binder  mixing  plants to licensees  during 1998 for  $1,088,000,
generating a gross profit of $200,000.  Covol  provides  binder  material to its
licensees  either at a fixed price or at Covol's cost plus a contracted  markup.
Covol  purchases the binder  materials  under a long-term  contract with a large
chemical  company.   Total  binder  sales  during  1998  were  $994,000  with  a
corresponding direct cost to Covol of $642,000.

         Operating Costs and Expenses. Operating costs and expenses increased by
$2,372,000 or 23% to $12,688,000  during 1998 from $10,316,000 during 1997. Cost
of coal briquetting operations increased $305,000 from $5,260,000 during 1997 to
$5,565,000  during 1998.  During 1997,  Covol recorded an expense for $1,477,000
relating  to  construction  penalties  for  failure  to  proceed  under  several
contracts Covol had entered into. There was no similar expense in 1998. However,
during 1998 Covol incurred significantly higher operating expenses in connection
with the continued refinement and implementation of the briquetting process, and
the  commercialization  of this  process in  connection  with the 24  facilities
placed in service  during 1998,  including  the four  facilities  held for sale.
These  expenses  related  in  part to the  construction  and  operation  of four
synthetic fuel facilities built by Covol that were held for sale, costs incurred
in  providing  assistance  to  Covol's  licensees  during  the  ramp-up of their
synthetic fuel facilities, and increased personnel costs. These increases during
1998 effectively offset the 1997 construction  penalty expenses.  Covol operated
one of the synthetic fuel facilities for Coaltech, a partnership for which Covol
is the general partner.  Under this operating agreement,  Covol is contractually
obligated to purchase  all of the  synthetic  fuel  produced at cost plus $1 per
ton.  Production  of  synthetic  fuel from  this  facility  during  1998 was not
significant and accordingly,  the cost per ton is significantly in excess of the
current  market  value.  These costs and the  corresponding  write-down  of this
inventory  to its  market  value are  included  in the cost of coal  briquetting
operations.   The  write-down  was  approximately  $1,400,000  during  1998  and
$1,548,000 during 1997.

         Selling,  general and administrative  expenses increased  $1,438,000 or
48% to $4,436,000 during 1998 from $2,998,000 for 1997.  Approximately  $500,000
of this increase  related to a substantial  increase in travel and related costs
as  Covol's  employees  spent a  significantly  greater  amount of time at Covol
facilities  and  licensee-owned  facilities.  The  balance  of the  increase  in
expenses relates to approximately $250,000 of commissions incurred in connection
with the placement of synthetic fuel license  agreements,  $175,000 in increased
professional  fees  and a  $500,000  increase  in  payroll  and  related  costs,
resulting from additional employees hired.

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

         In 1998,  Covol sold the facility owned by Alabama  Synfuel #1 Ltd. for
$6,500,000,  in exchange for a note receivable due not later than February 2003.
A loss of $218,000 was incurred from the sale of this facility. Covol

                                       24
<PAGE>

believes the note receivable,  which is classified as a facility-dependent  note
receivable in the consolidated balance sheet, is collectible from the debtor, or
in the event of the debtor's failure to satisfy the obligation,  by the debtor's
parent,  Covol that will ultimately  utilize the tax credits  generated from the
synthetic fuel facility.  In 1997,  Utah Synfuel #1 transferred  its facility to
Coaltech for $3,500,000,  evidenced by a promissory note payable in 44 quarterly
installments  of $130,000  starting March 31, 1997. The actual cost to construct
the Utah  Synfuel #1 facility  was  $4,082,000.  In  accordance  with  generally
accepted  accounting  principles  and  after  discussion  with the  staff of the
Securities and Exchange Commission, this transaction has not been reflected as a
sale for  accounting  purposes.  The original  cost of the  facility,  less cash
payments received from Coaltech,  is reflected in the consolidated balance sheet
as a facility transferred under note receivable arrangement.

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

         Other Income and Expense.  During 1998, Covol had net other expenses of
$1,694,000  compared to $329,000 for 1997.  This increase of $1,365,000  relates
primarily to an increase of $618,000 in net  interest  expense and a decrease of
$853,000 in minority  interest  in the net losses of  consolidated  subsidiaries
(Utah Synfuel #1 and Alabama Synfuel #1). During  September 1998,  Covol offered
the limited  partners of Utah  Synfuel #1 and Alabama  Synfuel #1 an exchange of
their limited partnership  interests for common stock of Covol. These exchanges,
most of which were accounted for in September 1998, were substantially completed
in November 1998, at which time Utah Synfuel #1 became a wholly-owned subsidiary
of Covol and Alabama Synfuel #1 became a 98%-owned subsidiary of Covol.

         Net Loss. For 1998, the loss increased by $810,000 from $10,498,000 for
1997 to $11,308,000.  The increase is primarily due to increased operating costs
and other expenses as discussed  previously.  Covol did not recognize any income
tax benefit in 1998 or 1997 since the  realization  of its  deferred tax assets,
consisting primarily of net operating loss carryforwards,  depends on generation
of future taxable income.

Liquidity and Capital Resources

         Liquidity.   During  1998,  Covol  and  its  licensees   completed  the
construction  of and began  operations at 24 synthetic  fuel  facilities.  Covol
owned four facilities  which it held for sale during 1999. One facility was sold
in August 1999 and another was sold in December 1999.  Covol  currently owns two
facilities  which are being offered for sale and  anticipates  the sale of these
facilities  in early 2000.  Proceeds from the sale of these  facilities  will be
used to  retire  debt  that was  incurred  principally  in  connection  with the
construction  and operation of the  facilities  and for working  capital  needs.
Total  operating  expenses  associated  with  the  four  owned  facilities  cost
approximately  $500,000 per month during the quarter  ended  September 30, 1999.
These  operating  expenses  fluctuate  depending on the level of activity at the
owned facilities.

         Net cash used in operating  activities for the year ended September 30,
1999  ("1999") was  $17,516,000  compared to  $5,366,000 of cash used during the
year ended  September 30, 1998  ("1998").  Most of this change in cash flow from
operations is  attributable  to the 1999 net loss of  $28,393,000 as compared to
$11,308,000  in 1998.  Covol  has been  able to fund its  operating  activities,
including the continued refinement and  commercialization of its patented binder
technologies,  through the  incurrence  of debt and the issuance of  convertible
preferred stock,  common stock and common stock warrants.  During 1999, proceeds
from the issuance of notes payable totaled approximately  $11,193,000,  proceeds
from the issuance of preferred  stock totaled  $6,367,000  and proceeds from the
issuance of common stock totaled $3,775,000.

                                       25
<PAGE>

         Capital Resources.  During 1999, Covol's investing  activities were not
significant.  Investing  activities  in  1998  were  significant  and  consisted
primarily  of the  purchase  of  property,  plant  and  equipment  and the  four
facilities held for resale,  with most of the funds for these activities  coming
from the issuance of notes payable ($35,454,000) and from working capital. Covol
believes  that funds  required  for  investing  activities  will  continue to be
significantly  lower during 2000 as compared to 1998 because the construction of
synthetic  fuel  facilities  that qualified for federal income tax credits under
Section 29 of the IRC was completed during 1998. In order to receive tax credits
under IRC  Section  29, the  synthetic  fuel sold must be produced at a facility
placed in service by June 30, 1998 and Covol has no current  plans to  construct
additional synthetic fuel facilities.

         There are 24  synthetic  fuel plants  that  currently  utilize  Covol's
patented  technology  and from which Covol intends to earn license fees and / or
profits from the sale of binder.  These  facilities do not presently  operate at
levels needed to generate significant revenues to Covol.  Improved operations at
the plants depend on the ability of the plant owners to produce  synthetic  fuel
that meets  market  specifications  in order for the plant  owners to market the
synthetic fuel. Covol is assisting the plant owners in their efforts to overcome
production and marketing problems. Covol anticipates that recurring license fees
or royalties  from the  production  and sale of synthetic  fuel will continue to
increase during 2000 and beyond.  As production  levels  increase,  sales of the
binder   materials  by  Covol  to  its   licensees   are  expected  to  increase
proportionately.  Funds received by Covol from these  activities are expected to
be sufficient to cover Covol's operating costs and expenses at some point during
2000.

         In order for operating  activities to produce significant positive cash
flow, Covol and its licensees must successfully address certain operating issues
and marketing difficulties.  These problems have delayed Covol's expected growth
in license fees,  and have resulted in lower than expected cash flows and higher
than expected  capital  requirements.  Operating  issues which must be addressed
include, but are not limited to, feedstock  availability,  moisture content, Btu
content,  correct application of binder  formulation,  operability of equipment,
product  durability,  resistance  to  water  absorption  and  overall  costs  of
operations, which in many cases to date have resulted in unit costs in excess of
synthetic  fuel sale  prices.  Marketing  difficulties  which must be  addressed
relate to market acceptance of products  manufactured using Covol's  technology.
Industrial  coal users must be satisfied  that the synthetic  fuel is a suitable
substitute  for standard coal  products.  Moisture  content,  hardness,  special
handling  requirements and other  characteristics  of the synthetic fuel product
may affect its marketability and its sales price. Many industrial coal users are
also  limited in the amount of synthetic  fuel  product  they can purchase  from
Covol and its  licensees  because they have  committed to purchase a substantial
portion of their coal  requirements  through long-term coal contracts already in
place.  Reliance on spot markets and the overall  downward  trend in coal prices
have generally  produced lower sales prices as compared to long-term coal supply
contracts  common in the utility  industry.  Market  acceptance of the synthetic
fuel product  appears to have  improved  during 1999 even though  Covol's  owned
facilities and its licensees have only been able to secure  long-term  contracts
for the  sale  of a small  portion  of  their  production.  The  suitability  of
synthetic fuel as a coal substitute, particularly the quality characteristics of
synthetic fuel, and the traditional  long-term supply contract practices of fuel
buying in the utility  industry,  have made the  identification of purchasers of
synthetic fuel  difficult.  Covol  believes that initial  market  resistance for
synthetic fuel has decreased and believes long-term contracts can now be secured
allowing  Covol and its licensees to market the  synthetic  fuel they produce at
prices similar to coal.

         Covol  incurred a net loss for the year  ended  September  30,  1999 of
$28,393,000  and used  $17,516,000  of cash in its operating  activities for the
year. As discussed in Note 6 to the consolidated financial statements, Covol has
$20,626,000 of long-term debt due during the year ending  September 30, 2000. In
addition, Covol's convertible note payable with a face amount of $20,000,000 and
related  redeemable  convertible  preferred stock with an aggregate  liquidation
preference  of  approximately  $5,600,000  at December 31, 1999 contain  certain
provisions including an increase in the interest rate, immediate convertibility,
required escrow payments and possible  immediate payment of outstanding  amounts
in the event of a default  by Covol.  Such an event  could  include a failure of
Covol's  shareholders  to  approve  the  issuance  of the  convertible  debt and
convertible preferred stock by March 31, 2000 or failure of Covol to achieve the
targeted  earnings  levels.  Covol  believes that  shareholder  approval will be
obtained and that Covol will achieve the targeted  earnings levels during fiscal
2000.

                                       26
<PAGE>

         Covol has funded its  operations  during the year ended  September  30,
1999 primarily through the issuance of debt and equity securities,  and the sale
of a synthetic fuel facility.  During  November 1998,  Covol issued common stock
and common stock  warrants for total net proceeds of  approximately  $3,729,000.
During January 1999, Covol issued  convertible  preferred stock and warrants for
total net proceeds of  approximately  $899,000.  During March 1999, Covol issued
convertible  secured debt,  convertible  redeemable  preferred  stock and common
stock  warrants  for total  net  proceeds  of  approximately  $14,581,000.  From
September  through  December  1999,  Covol issued  convertible  secured debt and
warrants for total net proceeds of approximately  $3,500,000 and is currently in
discussions with creditors to whom debt is owed in January 2000. As discussed in
Note 17 to the consolidated  financial  statements,  in August 1999 and December
1999,  Covol sold two synthetic  fuel  facilities for cash proceeds in excess of
amounts  required  to  fully  retire  the  related  debt  collateralized  by the
facilities.  Also, on January 13, 2000, Covol excuted definitive  agreements for
the sale of one synthetic  fuel facility and executed a letter of intent for the
sale of the only remaining facility held for sale.

         Covol believes that there are several alternatives  available that will
provide the working capital  necessary to meet operational  requirement and debt
payments as they become due, including  proceeds  from the sale of its remaining
facilities  held  for  sale,  funds  from  operations,  and  only  if  no  other
alternatives  exist,  additional  financing.  Covol  believes it will be able to
extend the repayment terms of its debt and that excess proceeds from the sale of
facilities  will be  sufficient to fund Covol's  operations  until its operating
activities begin producing positive cash flow.

         In connection  with the financing  Covol obtained in March 1999,  Covol
has agreed to certain covenants  contained in the recently  completed  financing
documents.  One covenant requires Covol to meet certain earnings targets for the
quarter  ending  December  31, 1999 and for  subsequent  quarters.  Consolidated
earnings before interest,  taxes,  depreciation  and  amortization  (EBITDA) and
certain other  adjustments,  of  $5,000,000  is required for the quarter  ending
December 31, 1999. The EBITDA target increases in subsequent quarters. As of the
date of this report, Covol expects it will be able to comply with this provision
during  fiscal  2000.  Covol's  current  operations  are at  levels  below  this
requirement;  however,  the sale of the  Covol-owned  facility in December  1999
resulted in a gain in excess of  $5,000,000.  Additionally,  operating  expenses
have  decreased  as a result of the sale of the  facilities  in August  1999 and
December 1999.  Operation of the synthetic  fuel  facilities at or near capacity
should result in EBITDA at levels in excess of this requirement.  Non-compliance
with this  provision  would result in an increase in the debt coupon rate by one
percentage point immediately and each 90 days thereafter until cured.  Also, the
debt would become immediately convertible at a price not less than $6.67 or more
than $10.00 which  calculation is based upon the current market price of Covol's
stock. Upon the second event of non-compliance  with this provision,  Covol will
be required to deposit approximately  $3,000,000 into an escrow account. Failure
to make payments into the escrow  account  results in royalty  payments from the
related  collateral  being made  directly to the debt  holders.  There are other
provisions  and covenants in these loan  documents that may restrict or prohibit
certain activities.

Forward Looking Statements

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

                                       27
<PAGE>

o        the ability of Covol and its licensees to resolve the  operational  and
         marketing issues described above; o the ability of licensees to produce
         and sell  synthetic fuel at or near the rated capacity of the synthetic
         fuel facilities and willingness and ability of licensees to make timely
         payments for binder materials purchased and royalty amounts due;

o        ability to obtain  needed  additional  capital on terms  acceptable  to
         Covol;

o        changes in  governmental  regulation or failure to comply with existing
         regulation which may result in operational shutdowns of its facilities;
         and

o        the  availability  of tax credits  under Section 29 of the tax code and
         qualification of facilities currently in service.

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

Impact of Inflation

         During 1999,  cost increases to Covol were not  materially  impacted by
inflation.

Other Items

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  to  be  set  forth  under  the  captions   "Executive
Officers,"  "Section  16(a)  Beneficial  Ownership  Reporting   Compliance"  and
"Proposal No. 1: Election of Director" in Covol's Proxy Statement to be dated on
or about January 17, 2000, for the Annual Meeting of  Stockholders to be held on
or about February 29, 2000 (the "Proxy  Statement"),  are incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

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

                                       28
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

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

(a)      1.    Financial Statements

Consolidated Financial Statements of Covol Technologies, Inc.
Report of Independent Accountants........................................    F-1

Consolidated Balance Sheets as of September 30, 1998 and 1999............    F-2

Consolidated Statements of Operations
         for the years ended September 30, 1997, 1998 and 1999...........    F-4

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
         for the years ended September 30, 1997, 1998 and 1999...........    F-5

Consolidated Statements of Cash Flows
         for the years ended September 30, 1997, 1998 and 1999...........    F-8

Notes to Consolidated Financial Statements...............................   F-10

         2.       Financial Statement Schedules

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

         3.       Listing of Exhibits

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

         There is  included a restated  financial  data  schedule  for the years
ended September 30, 1997 and 1998.

<TABLE>
<CAPTION>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
2.1              Agreement and Plan of Reorganization, dated July 1, 1993 between Covol and the            (1)
                 Stockholders of R1001

                                       29
<PAGE>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
2.2              Agreement and Plan of Merger dated August 14, 1995 between Covol and Covol                (1)
                 Technologies, Inc., a Delaware corporation

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

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

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

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

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

3.1              Certificate of Incorporation of Covol                                                     (1)

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

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

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

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

3.1.5            Certificate of Designation, Number, Voting Powers, Preferences and Rights of Covol's      (14)
                 Series C 7% Convertible Preferred Stock

3.1.6            Certificate of Designations, Number, Voting Powers, Preferences and Rights of the Series  (15)
                 of the Preferred Stock of Covol Technologies, Inc. to be Designated Series D 7% Cumulative
                 Convertible Preferred Stock

3.2              By-Laws of Covol                                                                          (1)

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

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

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

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

4.2              Promissory Note dated December 8, 1998 of Covol to Mountaineer Synfuel, L.L.C. (filed as  (13)
                 Exhibit 10.52.4 hereto)

4.3              Security Agreement dated December 8, 1998 between Mountaineer Synfuel, L.L.C. and         (13)
                 Covol (filed as Exhibit 10.52.5 hereto)

4.4              Convertible Secured Note executed by Covol in favor of OZ Master Fund, Ltd., dated as of  (15)
                 March 17, 1999 (filed as Exhibit 10.58.1 hereto)

                                       30
<PAGE>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
9.1              Special Powers of Attorney Coupled With an Interest dated February 1, 1996 between Covol, (1)
                 Gerald Larson and Michael McEwan

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

10.5             1995 Stock Option Plan                                                                    (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       31
<PAGE>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
10.39.5 **       Amended and Restated License Agreement, and Binder Purchase dated December 12, 1997,      (9)
                 by and among Covol, AS #1 and Birmingham Syn Fuel.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.52.4          Promissory Note dated December 8, 1998 of Covol Technologies, Inc. to Mountaineer        (13)
                 Synfuel, L.L.C.

10.52.5          Security Agreement dated December 8, 1998 between Mountaineer Synfuel, L.L.C. and        (13)
                 Covol Technologies, Inc.

10.52.6          Leasehold Credit Line Deed of Trust and Security Agreement dated December 8, 1998 by     (13)
                 Covol Technologies, Inc. for Mountaineer Synfuel, L.L.C. as Beneficiary.

                                       32
<PAGE>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
10.52.7          Amendment No. 1 to Deed of Ground Lease dated December 8, 1998 between Upshur             (13)
                 Property, Inc. and Covol Technologies, Inc.

10.53.1          Debenture Agreement and Security Agreement dated as of January 9, 1998, between Covol     (13)
                 and AJG Financial Services, Inc.

10.53.2          Debenture dated as of January 9, 1998 between Covol and AJG Financial Services, Inc.      (13)

10.53.3          Warrant A dated as of January 9, 1998, issued by Covol in favor of AJG Financial          (13)
                 Services, Inc.

10.53.4          Warrant B dated as of January 9, 1998, issued by Covol in favor of AJG Financial          (13)
                 Services, Inc.

10.53.5          Registration Rights Agreement dated as of January 9, 1998, between Covol and AJG          (13)
                 Financial Services, Inc.

10.54            Employment Agreement effective May 1, 1998 with Steven G. Stewart                         (13)

10.55            Employment Agreement effective August 1, 1997 with Dee J. Priano                          (13)

10.56            Employment Agreement effective April 21, 1998 with Brent M. Cook                          (14)

10.57            Employment Agreement effective January 1, 1999 with Steven R. Brown                       (14)

10.58            Securities Purchase Agreement between Covol Technologies, Inc. and OZ Master Fund, Ltd.   (15)
                 dated as of March 17, 1999

10.58.1          Convertible Secured Note executed by Covol in favor of OZ Master Fund, Ltd. dated as of   (15)
                 March 17, 1999

10.58.2          Registration Rights Agreement between Covol Technologies, Inc. and OZ Master Fund, Ltd.   (15)
                 dated as of March 17, 1999

10.58.3          Security Agreement between Covol Technologies, Inc. and OZ Master Fund, Ltd. dated as of  (15)
                 March 17, 1999

10.58.4          Series A Warrant in favor of OZ Master Fund, Ltd. dated March 17, 1999                    (15)

10.58.5          Series B Warrant in favor of OZ Master Fund, Ltd. dated March 17, 1999                    (15)

10.58.6          Series C Warrant in favor of OZ Master Fund, Ltd. dated March 17, 1999                    (15)

10.58.7          Series D Warrant in favor of OZ Master Fund, Ltd. dated March 17, 1999                    (15)

10.58.8          Series E Warrant in favor of Leeds Group dated March 17, 1999                             (15)

10.58.9          Series E Warrant in favor of Howard L. Schwartz dated March 17, 1999                      (15)

10.58.10         Series E Warrant in favor of Jack A. Schwebel dated March 17, 1999                        (15)

10.58.11         Series E Warrant in favor of Brent M. Lockwood dated March 17, 1999                       (15)

10.59            Secured Draw Down Promissory Note dated June 12, 1998 executed by Covol in favor of       (16)
                 Trans Pacific Stores, Ltd.

10.59.1          Loan and Security Agreement dated June 12, 1998 executed by Covol in favor of Trans       (16)
                 Pacific Stores, Ltd.

10.59.2          Letter Amendment dated May 6, 1999 between Covol and Trans Pacific Stores, Ltd.           (16)

                                       33
<PAGE>

 Exhibit No.                                        Description                                          Location
<S>              <C>                                                                                     <C>
10.60            Employment Agreement effective April 20, 1999 with Kirk A. Benson                         (17)

10.61            Purchase Agreement dated as of August 27, 1999 relating to the sale of the River Hill     (18)
                 Project***

10.61.1          License and Binder Purchase Agreement dated as of August 27, 1999 relating to the River   (18)
                 Hill Project***

10.61.2          Modification Agreement dated as of August 27, 1999 by and between the Purchaser of the    (18)
                 River Hill Project, Fun Enterprises Pty Limited and Covol Technologies, Inc.***

10.62            Securities Purchase Agreement dated September 17, 1999 between Aspen Capital Resources,   (19)
                 L.L.C. and Covol

10.62.1          Security Agreement dated September 17, 1999 between Aspen Capital Resources, L.L.C. and   (19)
                 Covol

10.63            Securities Purchase Agreement dated December 7, 1999 between DH Financial, L.C. and        *
                 Covol

10.63.1          Security Agreement dated December 6, 1999 between DH Financial, L.C. and Covol             *

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

21.1             List of Subsidiaries of Covol                                                              *

23.1             Consent of PricewaterhouseCoopers LLP                                                      *

27.1             Financial Data Schedule for the fiscal year ended September 30, 1999                       *

27.2             Restated Financial Data Schedule for the fiscal years ended September 30, 1997 and 1998    *
</TABLE>

-----------------------
*        Filed herewith.

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

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

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

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

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

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

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

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

                                       34
<PAGE>

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

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

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

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

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

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

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

(13)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Annual  Report on Form 10-K,  for the fiscal year ended  September  30,
         1998.

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

(15)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current  Report on Form 8-K, for the event dated March 17, 1999,  filed
         March 24, 1999.

(16)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Quarterly Report on Form 10-Q, for the quarterly period ended March 31,
         1999.

(17)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

(18)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Current  Report on Form 8-K/A,  for event dated August 27, 1999,  filed
         September 28, 1999.

(19)     Incorporated  by reference to the indicated  exhibit filed with Covol's
         Registration  Statement on Form S-3/A (SEC file no.  333-67371),  filed
         October 13, 1999.

Reports on Form 8-K

         The  following  reports on Form 8-K were filed during the quarter ended
September 30, 1999:

o        July 7, 1999 Announcement of Proposed Transactions

o        September 13, 1999, as amended on September 28, 1999,  Announcement  of
         Sale of River Hill Facility

Exhibits

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

Financial Statement Schedules

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

                                       35
<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/ Kirk A. Benson
                                             --------------------------------
                                             Kirk A. Benson
                                             Chief Executive Officer and
                                             Principal Executive Officer

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

                                          Date: January 13, 2000

         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/ Kirk A. Benson         Chief Executive Officer             January 13, 2000
-----------------      (Principal Executive Officer) and
Kirk A. Benson                      Director

/s/ Steven G. Stewart        Chief Financial Officer           January 13, 2000
-----------------           (Principal Financial and
Steven G. Stewart             Accounting Officer)

/s/ Brent M. Cook            President and Director            January 13, 2000
-----------------
Brent M. Cook

/s/ DeLance W. Squire               Director                   January 13, 2000
---------------------
DeLance W. Squire

/s/ James A. Herickhoff             Director                   January 13, 2000
-----------------------
James A. Herickhoff

/s/ Raymond J. Weller               Director                   January 13, 2000
---------------------
Raymond J. Weller

/s/ John P. Hill, Jr.               Director                   January 13, 2000
---------------------
John P. Hill, Jr.

                                       36
<PAGE>

                        Report of Independent Accountants

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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows  present  fairly in all  material  respects,  the  consolidated  financial
position of Covol Technologies,  Inc. and Subsidiaries ("Covol") as of September
30, 1998 and 1999, and the  consolidated  results of their  operations and their
cash flows for the years ended  September 30, 1997, 1998 and 1999, in conformity
with generally accepted accounting  principles.  These financial  statements are
the  responsibility of Covol's  management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP

Salt Lake City, Utah
January 13, 2000

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
                                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED BALANCE SHEETS

                                                                                         As of September 30,
(thousands of dollars)                                                                  1998            1999
----------------------------------------------------------------------------------- -------------- ----------------
ASSETS

Current assets:
<S>                                                                                 <C>              <C>
     Cash and cash equivalents                                                            $   727          $   461
     Receivables                                                                            3,200            3,155
     Due from related party                                                                 1,012            2,722
     Inventories                                                                            1,645              573
     Advances on inventories                                                                2,522               --
     Facilities held for sale                                                              27,582           20,139
     Prepaid expenses and other current assets                                                361               19
                                                                                    -------------- ----------------
            Total current assets                                                           37,049           27,069
                                                                                    -------------- ----------------
Property, plant and equipment, net of accumulated depreciation                             15,809           14,182
                                                                                    -------------- ----------------

Other assets:
     Restricted cash and investments                                                          748              843
     Facility-dependent notes and accrued interest receivable                               7,646            7,879
     Facility transferred under note receivable arrangement                                 3,166            2,641
     Intangible assets, net of accumulated amortization                                     3,118            3,647
     Deposits and other assets                                                                525            1,834
                                                                                    -------------- ----------------
            Total other assets                                                             15,203           16,844
                                                                                    -------------- ----------------

            Total assets                                                                  $68,061          $58,095
                                                                                    ============== ================
</TABLE>
                                   (continued)


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

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                     COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      CONSOLIDATED BALANCE SHEETS, continued

                                                                                          As of September 30,
(thousands of dollars and shares)                                                        1998            1999
------------------------------------------------------------------------------------ -------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
<S>                                                                                  <C>             <C>
     Accounts payable                                                                     $  3,036         $  1,179
     Due to related party                                                                    1,609            2,706
     Accrued interest payable, current                                                         653            1,452
     Accrued liabilities                                                                     2,205            2,905
     Notes payable, current                                                                 22,049           20,626
                                                                                     -------------- ----------------
            Total current liabilities                                                       29,552           28,868
                                                                                     -------------- ----------------

Long-term liabilities:
     Notes payable, non-current                                                             13,930           17,887
     Accrued interest payable, non-current                                                     566              210
     Notes and accrued interest payable - related parties                                      147               --
     Deferred revenues from advance license fees                                             8,377            7,501
     Deferred compensation                                                                     236              208
                                                                                     -------------- ----------------
            Total long-term liabilities                                                     23,256           25,806
                                                                                     -------------- ----------------
            Total liabilities                                                               52,808           54,674
                                                                                     -------------- ----------------

Minority interest in consolidated subsidiaries                                                 507              117

Commitments and contingencies

Redeemable convertible preferred stock, $0.001 par value, issued and outstanding
   0 shares at September 30, 1998 and 60 shares at September 30, 1999 (aggregate
   liquidation preference of $7,607 at September 30, 1999)                                      --            4,332

Stockholders' equity (deficit):
     Convertible  preferred stock,  $0.001 par value;  authorized 10,000 shares,
      issued and  outstanding  316 shares at September 30, 1998 and 17 shares at
      September 30, 1999 (aggregate liquidation preference of $3,705 at
      September 30, 1999)                                                                        1                1
     Common stock, $0.001 par value; authorized 25,000 shares, issued and
      outstanding 11,272 shares at September 30, 1998 and 12,766 shares at
      September 30, 1999                                                                        11               13
     Capital in excess of par value                                                         69,284           78,457
     Accumulated deficit                                                                   (43,002)         (71,713)
     Notes and interest receivable -- related parties, from issuance of, or
      collateralized by, common stock, net of allowance                                     (7,773)          (6,564)
     Deferred compensation from stock options                                               (3,775)          (1,222)
                                                                                     -------------- ----------------
            Total stockholders' equity (deficit)                                            14,746           (1,028)
                                                                                     -------------- ----------------
            Total liabilities and stockholders' equity (deficit)                           $68,061          $58,095
                                                                                     ============== ================
</TABLE>
                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                                         COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                     Year ended September 30,

(thousands of dollars, except per-share data)                               1997              1998               1999
--------------------------------------------------------------------- ----------------- ------------------ ------------------
Revenues:
<S>                                                                  <C>                  <C>                <C>
     License fees                                                            $     105           $    860          $   3,526
     Synthetic fuel sales                                                           42                 32                767
     Binder sales                                                                  ---                994              2,140
     Binder plant sales                                                            ---              1,088                ---
     Other                                                                         ---                100                286
                                                                      ----------------- ------------------ ------------------
          Total revenues                                                           147              3,074              6,719
                                                                      ----------------- ------------------ ------------------

Operating costs and expenses:

     Cost of coal briquetting operations                                         5,260              5,565             12,956
     Cost of binder                                                                ---                642              1,695
     Cost of binder plants                                                         ---                888                ---
     Asset write-offs and other non-recurring charges                              ---                ---              5,362
     Selling, general and administrative                                         2,998              4,436              4,727
     Compensation expense from stock options, stock warrants and
          issuance of common stock                                               2,058                939              2,553
     Loss on sale of facility                                                      ---                218              1,839
                                                                      ----------------- ------------------ ------------------
        Total operating costs and expenses                                      10,316             12,688             29,132
                                                                      ----------------- ------------------ ------------------
Operating loss                                                                 (10,169)            (9,614)           (22,413)
                                                                      ----------------- ------------------ ------------------

Other income (expense):
     Interest income                                                                98                580              1,586
     Interest expense                                                           (1,645)            (2,745)            (6,253)
     Minority interest in net (income) losses of
      consolidated  subsidiaries                                                 1,245                392                (9)
     Write-up (write-down) of notes receivable - related parties,
      collateralized by common stock                                               (60)                19            (1,209)
     Other, net                                                                     33                 60               (95)
                                                                      ----------------- ------------------ ------------------
          Total other income (expense)                                            (329)            (1,694)            (5,980)
                                                                      ----------------- ------------------ ------------------
Net loss                                                                      $(10,498)          $(11,308)          $(28,393)
                                                                      ================= ================== ==================
Basic and diluted loss per common share                                         $(1.32)            $(1.17)            $(2.39)
                                                                      ================= ================== ==================
</TABLE>
                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                               COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                      Notes and
                                                                                                       interest
                                                                                                      receivable
                                                                                                       -related
                                                                                                     parties, from
                                                                                                      issuance of,     Deferred
                        Convertible Preferred                                                               or           compen-
(thousand                        Stock                   Common Stock        Capital in               collateralized     sation
of dollars           ------------------------------------------------------ excess of par  Accumulated   by, common    from stock
and shares)               Shares       Amount       Shares        Amount       valule       deficit        stock         options
-----------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>         <C>         <C>           <C>          <C>         <C>             <C>
Balances at
September 30, 1996            --         $--         7,714         $8           $33,715     $(21,196)       $(7,580)      $(5,180)

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

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

Common stock issued
 for services                                           98         --               789

Inducement related to
 conversion of notes
 payable into common
 stock                                                                              323

Common stock
 issued to repay
 note payable - related
 parties                                                21         --               136

Common stock issued
 on conversion of note
 payable                                               141         --             1,125

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

Common stock issued
 for cash, including
 exercise of stock options                             400         --             2,798

Common stock issued
 for distribution rights                                30         --               266

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

Amortization of
 deferred compensation
 from stock options                                                                                                         1,675

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

Payment on notes
 receivable - related parties                                                                                   109

Write-down of notes
 receivable - related parties                                                                                    60
</TABLE>

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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                                               COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

                                                                                                      Notes and
                                                                                                       interest
                                                                                                      receivable
                                                                                                       -related
                                                                                                     parties, from
                                                                                                      issuance of,     Deferred
                        Convertible Preferred                                                               or           compen-
(thousand                        Stock                   Common Stock        Capital in               collateralized     sation
of dollars           ------------------------------------------------------ excess of par  Accumulated   by, common    from stock
and shares)               Shares       Amount       Shares        Amount       valule       deficit        stock         options
-----------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>         <C>         <C>           <C>          <C>         <C>             <C>
Preferred stock
 issued for cash,
 net of offering costs       303           1                                      5,094

Net loss for the
 year ended
 September 30, 1997                                                                          (10,498)
                        -----------------------------------------------------------------------------------------------------------
Balances at
 September 30, 1997          303           1         9,089          9            50,203      (31,694)        (7,411)       (4,683)
                        -----------------------------------------------------------------------------------------------------------

Common stock issued
 to purchase minority
 interests in
 subsidiaries                                          540          1             5,383

Common stock issued
 for cash, including
 exercise of stock options                             533         --             3,257

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

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

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

Payment received on
 notes receivable --
 related parties                                                                                                329

Amortization of deferred
 compensation from stock
 options                                                                                                                      908

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

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

Reclassification of
 notes receivable - related
 parties                                                                                                       (672)

Net loss for the year
 ended September 30, 1998                                                                    (11,308)
                        -----------------------------------------------------------------------------------------------------------
Balances at
 September 30, 1998          316           1        11,272         11            69,284      (43,002)        (7,773)       (3,775)
                        -----------------------------------------------------------------------------------------------------------

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

Common stock and
 warrants to purchase
 common stock issued for
 cash, including exercise
 of stock options                                      776          1             3,774
</TABLE>

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

                                       F-6
<PAGE>
<TABLE>
<CAPTION>
                                               COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

                                                                                                      Notes and
                                                                                                       interest
                                                                                                      receivable
                                                                                                       -related
                                                                                                     parties, from
                                                                                                      issuance of,     Deferred
                        Convertible Preferred                                                               or           compen-
(thousand                        Stock                   Common Stock        Capital in               collateralized     sation
of dollars           ------------------------------------------------------ excess of par  Accumulated   by, common    from stock
and shares)               Shares       Amount       Shares        Amount       valule       deficit        stock         options
-----------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>         <C>         <C>           <C>          <C>         <C>             <C>
Value of common
 stock warrants
 issued under terms
 of existing debt
 agreement and in
 connection with
 extension of note
 payable due date                                       --         --               453

Common stock issued
 for rights to technology                               60         --               375

Common stock issued
 on conversion of
 preferred stock
 and in payment of
 dividends                  (300)         --           602          1               194         (195)

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

Value of common stock
 options and warrants
 issued in connection
 with debt financing                                    --         --               323

Preferred stock and
 warrants to purchase
 common stock
 issued for cash, net of
 offering costs                1          --                                        899

Value of common stock
 warrants issued in
 connection with
 redeemable convertible
 preferred stock and
 convertible debt                                                                 2,435

Value of extended and
 repriced warrants
 issued in connection
 with satisfaction of
 notes payable                                          --         --               201

Preferred stock cash
 dividends                                                                                      (123)

Write-down of notes
 receivable - related parties                                                                                 1,209

Amortization of deferred
 compensation from stock
 options                                                                                                                    2,553

Net loss for the year
 ended September 30, 1999                                                                    (28,393)
                        -----------------------------------------------------------------------------------------------------------
Balances at
 September 30, 1999           17          $1        12,766        $13           $78,457     $(71,713)       $(6,564)      $(1,222)
                        ===========================================================================================================
</TABLE>
                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                      F-7
<PAGE>
<TABLE>
<CAPTION>
                                             COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                               CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                                Year ended September 30,
(thousands of dollars)                                                                       1997         1998         1999
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                                                        <C>           <C>          <C>
Net loss                                                                                   $(10,498)     $(11,308)    $(28,393)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                               193           523        2,570
    Recognition of deferred revenue from advance license fees                                  (105)         (654)        (876)
    Asset write-offs and other non-recurring charges                                            ---           ---        5,362
    Amortization of deferred compensation from stock options                                  1,675         1,035        2,553
    Loss on sale of facility and loss on disposition of equipment                               ---           218        1,979
    Minority interest in net income (losses) of consolidated subsidiaries                    (1,245)         (392)           9
    Write-down (write-up) of notes receivable - related parties                                  60           (19)       1,209
    Interest expense related to amortization of debt discount and debt issuance
      costs                                                                                     ---           ---        2,075
    Interest expense related to issuance of convertible debt at a discount                    1,429         2,046          ---
    Common stock issued for services                                                          1,055           ---          ---
    Inducement expense related to conversion of notes payable into common stock                 323           ---          ---
    Increase (decrease) from changes in operating assets and liabilities, net of
      effects from investing and financing activities:
        Receivables                                                                            (444)       (3,690)      (1,944)
        Inventories and other current assets                                                 (1,155)       (1,570)         107
        Accrued interest receivable - non-current                                               ---          (486)        (893)
        Accounts payable and other current liabilities                                        2,576           935         (637)
        Accrued interest payable, non-current                                                   204           362         (356)
        Deferred revenues from advance license fees                                           1,650         7,486          ---
        Other, net                                                                             (142)          148         (281)
                                                                                          --------------------------------------
           Net cash used in operating activities                                             (4,424)       (5,366)     (17,516)
                                                                                          --------------------------------------

Cash flows from investing activities:
    Purchase of property, plant and equipment and facilities held for sale                   (7,194)      (36,963)        (861)
    Proceeds from sale of facilities held for sale and equipment                                ---           ---        1,433
    Purchase of rights to technology                                                            ---           ---         (127)
    Proceeds from facility transferred under note receivable arrangement                        235           647          525
    Increase in deposits collateralizing letters of credit and restricted cash                  ---          (748)         (95)
    Investment in licensee facility                                                             ---          (340)         ---
    Issuance of note receivable                                                                 ---          (660)         ---
                                                                                          --------------------------------------
       Net cash provided by (used in) investing activities                                   (6,959)      (38,064)         875
                                                                                          --------------------------------------
Cash flows from financing activities:
    Proceeds from issuance of notes payable and warrants                                      6,070        35,454       11,193
    Payment on notes payable                                                                 (1,109)        (330)       (4,690)
    Proceeds from issuance of notes payable -- related parties                                  595           ---          ---
    Payment on notes payable -- related parties                                                (756)          ---         (147)
    Proceeds from issuance of preferred stock and warrants, net                               5,095            90        6,367
    Proceeds from issuance of common stock and warrants, net                                  5,573         3,257        3,775
    Preferred stock dividends                                                                   ---           ---         (123)
    Proceeds from receivable -- stock subscriptions                                             ---           577          ---
    Proceeds from notes receivable -- related parties, collateralized by common                 109           329          ---
       stock
    Proceeds from issuance of minority interests in subsidiaries                                302           ---          ---
    Cash distribution to minority interest limited partners                                    (206)          ---          ---
                                                                                          --------------------------------------
       Net cash provided by financing activities                                             15,673        39,377       16,375
                                                                                          --------------------------------------

Net increase (decrease) in cash and cash equivalents                                          4,290        (4,053)        (266)

Cash and cash equivalents, beginning of year                                                    490         4,780          727
                                                                                          --------------------------------------
Cash and cash equivalents, end of year                                                       $4,780         $ 727        $ 461
                                                                                          ======================================
</TABLE>
                                   (continued)

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

                                      F-8
<PAGE>
<TABLE>
<CAPTION>
                                             COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS, continued


                                                                                                Year ended September 30,
(thousands of dollars)                                                                       1997        1998         1999
-------------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
<S>                                                                                      <C>          <C>           <C>
   Common stock issued to purchase minority interests in subsidiaries                         $ ---        $5,384        $ 519
   Common stock issued on conversion of preferred stock and in payment of                       ---           ---        2,761
     dividends
   Common stock issued on conversion of notes payable and related accrued interest                          8,179          ---
   Common stock issued for rights to technology                                                 ---           ---          375
   Notes payable issued for rights to technology                                                ---           ---          426
   Notes payable issued for equipment                                                         1,607           ---          424
   Property, plant and equipment acquired through reduction of current assets                   ---           ---          413
   Reduction of note payable upon sale of facility held for sale                                ---           ---        5,800
   Facility dependent note receivable issued for sale of facility                               ---         6,500          ---
   Facility transferred under note receivable arrangement                                     4,082           ---          ---
   Note payable issued for inventory                                                          1,595           ---          ---
   Accounts payable for facilities held for sale                                              1,968           588          ---
   Common stock issued for notes receivable                                                     577           ---          ---
   Common stock issued to repay notes payable and accrued interest -- related party           1,261           ---          ---
   Distribution to minority limited partners offset against note receivable                      66           ---          ---

Supplemental disclosure of cash flow information - cash paid for interest, net of
  amounts capitalized                                                                          $208           $49       $3,646
</TABLE>
                     The accompanying notes are an integral
                  part of the consolidated financial statements

                                       F-9
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   -----------


1. Summary of Significant Accounting Policies

   Business Organization and Nature of Operations

   Covol  Technologies,  Inc. was originally  incorporated in Nevada in 1987 and
   was  reincorporated in Delaware in August 1995. In June 1996, Utah Synfuel #1
   Ltd. ("Utah Synfuel #1") and Alabama Synfuel #1 Ltd.  ("Alabama Synfuel #1"),
   each a Delaware limited partnership  (collectively the "Partnerships"),  were
   formed.  Covol  Technologies,  Inc. is both the general partner and a limited
   partner in the  Partnerships  (see Note 13).  Covol  Technologies,  Inc.  and
   Subsidiaries'  ("Covol")  primary  business  is to  commercialize  its binder
   technologies which are used to recycle waste by-products from the coal, steel
   and other industries into marketable fuel and resources.

   Through June 1998,  Covol's focus was on the  construction  of facilities and
   the  licensing  of its  binder  technologies  to  entities  that  constructed
   facilities  that  convert  coal  fines into  synthetic  fuel  briquettes.  At
   September 30, 1999,  Covol and its licensees  were operating 28 facilities in
   ten states at various levels of production,  including four facilities  which
   are using a technology  that Covol acquired during 1999.  During 1999,  Covol
   has been actively pursuing the sale of its four owned facilities.  One of the
   facilities was sold in August 1999 and another was sold in December 1999 (see
   Notes 15 and 17). Covol expects to sell the remaining two facilities in early
   2000 (see  Note  17).  Covol has no  current  plans to  construct  additional
   synthetic fuel facilities.

   There are 24 synthetic fuel plants that currently  utilize  Covol's  patented
   technology and from which Covol intends to earn license fees and / or profits
   from the sale of binder.  These facilities do not presently operate at levels
   needed to generate significant revenues to Covol.  Improved operations at the
   plants  depend on the ability of the plant owners to produce  synthetic  fuel
   that meets market  specifications in order for the plant owners to market the
   synthetic  fuel.  Covol is  assisting  the plant  owners in their  efforts to
   overcome production and marketing problems.  Covol anticipates that recurring
   license fees or royalties from the production and sale of synthetic fuel will
   continue to increase during 2000 and beyond.  As production  levels increase,
   sales of the binder  materials  by Covol to its  licensees  are  expected  to
   increase  proportionately.  Funds received by Covol from these activities are
   expected to be sufficient to cover  Covol's  operating  costs and expenses at
   some point during 2000.

   In order for operating  activities to produce significant positive cash flow,
   Covol and its licensees must  successfully  address certain  operating issues
   and marketing difficulties.  These difficulties have delayed Covol's expected
   growth in license  fees,  and have resulted in lower than expected cash flows
   and higher than expected capital requirements. Operating issues which must be
   addressed include, but are not limited to, feedstock  availability,  moisture
   content, Btu content, correct application of binder formulation,  operability
   of equipment, product durability,  resistance to water absorption and overall
   costs of operations,  which in many cases to date have resulted in unit costs
   in excess of synthetic fuel sale prices. Marketing difficulties which must be
   addressed relate to market acceptance of products  manufactured using Covol's
   technology.  Industrial  coal users must be satisfied that the synthetic fuel
   is a suitable  substitute  for  standard  coal  products.  Moisture  content,
   hardness,  special  handling  requirements and other  characteristics  of the
   synthetic fuel product may affect its marketability and its sales price. Many
   industrial  coal  users are also  limited  in the  amount of  synthetic  fuel
   product  they can  purchase  from Covol and its  licensees  because they have
   committed  to  purchase a  substantial  portion  of their  coal  requirements
   through long-term coal contracts  already in place.  Reliance on spot markets
   and the overall  downward trend in coal prices have generally  produced lower
   sales prices as compared to  long-term  coal supply  contracts  common in the
   utility industry.  Market acceptance of the synthetic fuel product appears to
   have  improved  during  1999 even though  Covol's  owned  facilities  and its
   licensees have only been able to secure long-term contracts for the sale of a
   small portion of their  production.  The  suitability  of synthetic fuel as a
   coal substitute,  particularly the quality characteristics of synthetic fuel,
   and the traditional long-term supply contract practices of fuel buying in the
   utility  industry,  have made the  identification  of purchasers of synthetic
   fuel difficult.  Covol believes that initial market  resistance for synthetic
   fuel has  decreased  and  believes  long-term  contracts  can now be  secured
   allowing Covol and its licensees to market the synthetic fuel they produce at
   prices similar to coal.

   Principles of Consolidation

   The  consolidated  financial  statements for all years presented  include the
   accounts  of Covol and its two  subsidiaries,  Utah  Synfuel  #1 and  Alabama
   Synfuel  #1. All  significant  intercompany  transactions  and  accounts  are
   eliminated in  consolidation.  During 1997, Covol became a 1% general partner
   of Coaltech No. 1 L.P. ("Coaltech"), a Delaware limited partnership, for $10.
   Based upon Covol's lack of  effective  control over  Coaltech and the limited
   partners' financial responsibility for its operations,  Covol's investment in
   Coaltech  is  accounted  for  using the  equity  method  of  accounting  with
   proportional  elimination of intercompany revenues and expenses. See Notes 16
   and 17.

                                      F-10
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Revenue and Cost Recognition

   Revenues  from the  licensing of Covol's  technology  are  recognized  in the
   period when earned.  Non-refundable  advance  license fees are received  when
   certain synthetic fuel facility  construction  milestones are met or when the
   facilities   are  certified   operational   for  their  intended  use.  These
   non-refundable  advance  license  fees  are  deferred  and  recognized  on  a
   straight-line basis over the period covered by the related license agreement.
   Recurring  license  fees or royalty  payments  are  recognized  in the period
   synthetic  fuel is produced and sold by licensees.  Revenues from the sale of
   coal  briquettes  are  recognized  as product is shipped.  Collateral  is not
   required for  receivables  and  allowances  are  provided  for  uncollectible
   accounts when appropriate.

   Segment Reporting

   In 1999, Covol adopted Statement of Financial  Accounting  Standards No. 131,
   "Disclosures about Segments of an Enterprise and Related  Information" ("SFAS
   131").  SFAS 131  superseded  SFAS No. 14,  replacing the "industry  segment"
   approach with the "management"  approach.  The management approach designates
   the internal  organization  that is used by management  for making  operating
   decisions and assessing performance as the source of reportable segments. The
   adoption  of SFAS No. 131 did not affect  Covol's  results of  operations  or
   financial  position.  Based on Covol's  method of internal  reporting,  Covol
   operates   and  reports  as  a  single   industry   segment,   which  is  the
   commercialization  of its  binder  technologies.  Approximately  $653,000  of
   revenues  in 1998 and  $2,673,000  of  revenues  in 1999  were  from a single
   licensee,  $839,000 of revenues  in 1998 and  $1,032,000  of revenues in 1999
   were from a second  licensee and $463,000 of revenues in 1998 and $849,000 of
   revenues  in 1999  were  from a third  licensee.  No  other  single  customer
   accounted for over 10% of total revenues in any year presented.

   Cash and Cash Equivalents

   Covol considers all highly liquid debt instruments with an original  maturity
   of three months or less to be cash equivalents. Cash and cash equivalents are
   deposited with financial institutions located in Utah and at times may exceed
   insured depository limits.

   Due From/To Related Party

   Due from related party consists of amounts receivable from Coaltech primarily
   for  operating  expenses.  Due to related  party  represents  amounts  due to
   Coaltech for the purchase of synthetic fuel briquettes (see Notes 16 and 17).

   Inventories

   Inventories  are stated at the lower of cost or market  with cost  determined
   using an  average  cost  method,  and  consist  primarily  of coal  fines and
   synthetic  fuel  available  for  sale.  Covol  has a lease  arrangement  that
   provides  for the  purchase  and  removal  of coal  fines  which  are used as
   feedstock  for a  synthetic  fuel  facility.  Payments  made  under the lease
   arrangement  prior to removal of the coal fines are  recorded  as advances on
   inventories (see Note 14).

   Facilities Held for Sale

   At September 30, 1999,  facilities held for sale consisted of three synthetic
   fuel  facilities  and  were  stated  at the  lower of cost or  estimated  net
   realizable  value.  One of the facilities was sold in December 1999 (see Note
   17). The  facilities  were  constructed  to be sold at or above their cost to
   licensees of Covol's  technology.  Covol is actively pursuing the sale of the
   remaining two facilities and  anticipates  completing the sales in early 2000
   (see Note 17).  Covol  recognizes a gain or loss on facilities  held for sale
   when the sale is  consummated.  The gain or loss  represents  the  difference
   between  the  carrying  value  and the  sales  price  and is  reflected  as a
   component of operating costs and expenses.

   Property, Plant and Equipment

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

                                      F-11
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Restricted Cash and Investments

   Restricted  investments  consist  primarily of highly liquid interest bearing
   deposits held as collateral for certain Covol obligations and cash restricted
   by agreement for payments to one of Covol's major vendors.

   Intangible Assets

   Intangible assets consist of (i) the excess of the value of the consideration
   paid for the purchase of certain limited partners'  interests in subsidiaries
   over the fair values of the related  assets,  which fair values  approximated
   their carrying cost (see Note 13); and (ii) rights to technology,  consisting
   of a coal-based  synthetic fuel  technology and related  licensing and patent
   rights.  These  intangible  assets are being  amortized on the  straight-line
   method over approximately ten- and nine-year periods, respectively.

   Valuation of Long-Lived Assets

   Covol  periodically  evaluates  the  carrying  value  of  long-lived  assets,
   including  intangible  assets,  when events and circumstances  warrant such a
   review. The carrying value of a long-lived asset is considered  impaired when
   the  anticipated  cumulative  undiscounted  cash flow from that asset is less
   than its carrying  value.  In that event,  a loss is recognized  based on the
   amount by which the  carrying  value  exceeds  the fair  market  value of the
   long-lived  asset.  Two  impairment-related  losses have been  recognized  in
   Covol's  consolidated  financial statements for 1999, as more fully described
   in Note 14.

   Common Stock, Options and Warrants

   Common stock issued for services is accounted for using the fair value of the
   shares of common  stock,  determined  at the time the shares are issued.  The
   measurement date used to value non-employee option grants is the option grant
   date.  Such options,  as well as warrants  issued in connection with debt and
   equity financings,  including repricings and extensions of option and warrant
   expiration dates, are valued using the Black-Scholes  model. If modifications
   to  existing  options or  warrants  relating to debt  securities  occur,  the
   incremental  value of the  modified  options or warrants is  capitalized  and
   amortized to interest expense over the remaining life of the related debt.

   Loss per Share Calculation

   In 1998, Covol adopted Statement of Financial  Accounting  Standards No. 128,
   "Earnings  per Share"  ("SFAS  128").  SFAS 128 replaced the  calculation  of
   primary and fully diluted  earnings per share with basic and diluted earnings
   per share.  Unlike  primary  earnings  per share,  basic  earnings  per share
   excludes  any  dilutive   effects  of  options,   warrants  and   convertible
   securities.  Diluted  earnings  per share is  similar to the  previous  fully
   diluted earnings per share.  Loss per share amounts for all periods presented
   conform to SFAS 128 requirements and no restatements were necessary (see Note
   11).

   For all periods presented,  options,  warrants and convertible securities (as
   disclosed  in Notes 5, 6, 7 and 10) were not included in the  calculation  of
   loss per share because the effect would have been antidilutive.

   Use of Estimates

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

   Reclassifications

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

                                      F-12
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

2. Current Financial Condition

   Covol  incurred  a net  loss  for  the  year  ended  September  30,  1999  of
   $28,393,000 and used $17,516,000 of cash in its operating  activities for the
   year.  As discussed in Note 6, Covol has  $20,626,000  of long-term  debt due
   during the year ending September 30, 2000. In addition,  Covol's  convertible
   note  payable  with a face  amount  of  $20,000,000  and  related  redeemable
   convertible  preferred  stock with an  aggregate  liquidation  preference  of
   approximately  $5,600,000  at December  31, 1999 contain  certain  provisions
   including  an  increase  in  the  interest  rate,  immediate  convertibility,
   required  escrow  payments  and  possible  immediate  payment of  outstanding
   amounts in the event of a default  by Covol.  Such an event  could  include a
   failure of Covol's  shareholders  to approve the issuance of the  convertible
   debt and convertible preferred stock by March 31, 2000 or failure of Covol to
   achieve  the  targeted  earnings  levels.  Covol  believes  that  shareholder
   approval  will be obtianed and that Covol will achieve the targeted  earnings
   levels during fiscal 2000.

   Covol has funded its  operations  during the year ended  September  30,  1999
   primarily through the issuance of debt and equity securities  and the sale of
   a synthetic fuel facility.  During  November 1998,  Covol issued common stock
   and common stock warrants for total net proceeds of approximately $3,729,000.
   During January 1999,  Covol issued  convertible  preferred stock and warrants
   for total net proceeds of  approximately  $899,000.  During March 1999, Covol
   issued convertible secured debt,  convertible  redeemable preferred stock and
   common stock  warrants for total net proceeds of  approximately  $14,581,000.
   From September through December 1999, Covol issued  convertible  secured debt
   and  warrants  for total net  proceeds  of  approximately  $3,500,000  and is
   currently in discussions with creditors to whom debt is owed in January 2000.
   As  discussed in Note 17, in August 1999 and  December  1999,  Covol sold two
   synthetic fuel facilities for cash proceeds in excess of amounts  required to
   fully retire the related debt  collateralized  by the  facilities.  Also,  on
   January 13, 2000,  Covol executed  definitive  agreements for the sale of one
   synthetic  fuel  facility and executed a letter of intent for the sale of the
   only remaining facility held for sale (see Note 17).

   Covol  believes  that  there are  several  alternatives  available  that will
   provide the working capital  necessary to meet  operational  requirements and
   debt  payments as they become due,  including  proceeds  from the sale of its
   remaining  facilities held for sale,  funds from  operations,  and only if no
   other alternatives  exist,  additional  financing.  Covol believes it will be
   able to extend the repayment  terms of its debt and that excess proceeds from
   the sale of facilities  will be sufficient to fund Covol's  operations  until
   its operating activities begin producing positive cash flow.

3. Property, Plant and Equipment

   Property, plant and equipment consists of the following at September 30:
<TABLE>
<CAPTION>

  (thousands of dollars)                    Range of estimated useful         1998           1999
                                                      lives
  --------------------------------------- ------------------------------- -------------- --------------
<S>                                             <C>                       <C>            <C>
  Land                                                                            $ 153          $ 204
  Buildings and improvements                      10 - 15 years                  12,060         12,235
  Machinery and equipment                          5 - 10 years                   4,666          4,757
                                                                          -------------- --------------
                                                                                 16,879         17,196

   Less accumulated depreciation                                                (1,070)        (3,014)
                                                                          ============== ==============
   Net property, plant and equipment                                            $15,809        $14,182
                                                                          ============== ==============
</TABLE>

   Depreciation  expense was $193,000 in 1997,  $474,000 in 1998, and $1,988,000
in 1999.
                                      F-13
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

4.   Notes Receivable

   Notes receivable,  all of which were recorded  initially at their fair value,
consist of the following at September 30:
<TABLE>
<CAPTION>

   (thousands of dollars)                                                                             1998           1999
   ---------------------------------------------------------------------------------------------- -------------- --------------
<S>                                                                                                   <C>            <C>
   Facility-dependent Notes and Accrued Interest Receivable, Non-current

   Note receivable from a corporation,  bearing  interest at 12%,  principal and
   interest due not later than February 2003, collateralized by a synthetic fuel
   facility in Alabama sold by Covol in 1998.  This note receivable is recorded at
   an amount which does not exceed its fair value.                                                       $6,500         $6,500

   Accrued interest receivable from the above corporation                                                   486          1,379

   Unsecured note receivable from a corporation, bearing interest at 10%, receivable in

   quarterly principal installments.  This note was written off in September 1999 (see Note 14).            660            ---
                                                                                                  -------------- --------------
                                                                                                         $7,646         $7,879

                                                                                                  ============== ==============

   Facility Transferred under Note Receivable Arrangement

   Facility transferred under note receivable arrangement with Coaltech, bearing
   interest at 9.7%,  principal  and  interest  payments  of $130 due  quarterly
   through December 2007,  collateralized  by a synthetic fuel facility in Utah.
   All note payments, including principal and interest reduce the carrying amount
   of this asset (see Note 17).                                                                          $3,166         $2,641
                                                                                                  ============== ==============
</TABLE>

5.  Financing Transactions

   During and subsequent to the year ended  September 30, 1999,  Covol completed
   several financing transactions, including the following:

o        Issuance of  approximately  746,000 shares of common stock and warrants
         to purchase  approximately 746,000 shares of common stock pursuant to a
         private  offering in November 1998,  for net proceeds of  approximately
         $3,729,000.  The warrants have an exercise price of $7.50 per share and
         expire in June 2000.

o        Issuance of 1,000  shares of series C preferred  stock and  warrants to
         purchase  approximately  73,000 shares of common stock in January 1999,
         for net proceeds of  approximately  $899,000 (see Note 7). The warrants
         have an exercise  price of $6.88 per share,  expire July  2001and  were
         assigned a value of approximately $500,000.

o        Issuance of 60,000 shares of series D redeemable  convertible preferred
         stock,  convertible secured debt and warrants to purchase approximately
         1,284,000  shares of common stock in March 1999, for total net proceeds
         of  approximately  $14,581,000  (see Notes 6 and 7). The warrants  have
         exercise  prices  ranging from $5.00 to $10.00 per share and expiration
         dates  ranging  from March 2002 to March 2004.  The  warrants,  some of
         which were issued in connection with the convertible  preferred  stock,
         some in connection  with the  convertible  debt, and some in connection
         with both the preferred  stock and debt,  were valued at  approximately
         $3,000,000.  The value of the warrants  issued in connection  with both
         the preferred stock and debt was allocated on a pro-rata  basis,  based
         on the equity and debt portions of the total financing.  The restricted
         common stock  issuable  pursuant to the  conversion of the  convertible
         securities and exercise of  approximately  971,000  warrant shares have
         been provided demand and piggyback  registration  rights. The remaining
         warrants have been provided piggyback registration rights.

o        Issuance  of   convertible   secured  debt  and  warrants  to  purchase
         approximately  113,000  shares of common stock in September  1999,  for
         total net  proceeds  of  $740,000  (see Note 6). The  warrants  have an
         exercise  price of $3.60 per share,  expire in September  2002 and were
         assigned a value of approximately $184,000.

o        Issuance  of   convertible   secured  debt  and  warrants  to  purchase
         approximately  1,172,000 shares of common stock in October and December
         1999,  in  two  unrelated  transactions,  for  total  net  proceeds  of
         approximately  $2,815,000.  The warrants have exercise  prices  ranging
         from  $.88 to $3.60 per  share,  have  expiration  dates  ranging  from
         September   2002  to  December  2002  and  were  assigned  a  value  of
         approximately $562,000.

                                      F-14
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   During   November  and  December  1999,   approximately   $1,460,000  of  the
   convertible debt issued in the September and October  transactions  described
   above was converted into  approximately  2,532,000 shares of common stock. In
   January 2000,  Covol gave a redemption  notice to the holder of approximately
   $1,040,000 of the convertible debt issued in October 1999.
<TABLE>
<CAPTION>

6. Long-term Liabilities

   Notes Payable

   Notes payable consist of the following at September 30:

  (thousands of dollars)                                                                                1998          1999
  ------------------------------------------------------------------------------------------------- ------------- -------------

<S>                                                                                                    <C>          <C>
  Note payable to a corporation bearing interest at prime  (8.25% at September 30, 1999) plus 2%,
  collateralized by plant and equipment, repaid subsequent to September 30, 1999 (see Note 17).          $ 2,900       $ 2,900

  Note payable to the same corporation referred to in the preceding paragraph, bearing interest
  at 6%, collateralized by a coal wash plant in Utah, principal and interest due January 2000
  (see Note 17).                                                                                           4,263         4,313

  Notes  payable  to the  same  corporation  referred  to in the  preceding  two paragraphs,
  bearing  interest at 6%. 50% of accrued  interest is due February 2000  with  remaining
  accrued  interest  and  principal  due  February  2001.  Collateralized  by a synthetic fuel
  facility in West Virginia,  held for sale,  and license fees payable to Covol from the
  production and sale of synthetic fuel from four synthetic fuel facilities owned by the
  same corporation.                                                                                        6,680         6,500

  Note payable to a limited liability  company,  bearing interest at 10% payable monthly,
  with  principal due June 2000.  Collateralized  by a synthetic  fuel facility in West Virginia,
  held for sale, and license fees payable to Covol from the production and sale of synthetic fuel
  from six synthetic fuel facilities.                                                                      8,242         9,191

  Convertible secured note payable to an investment company issued at a discount, bearing a
  stated interest rate of 2.5% on the $20,000 face amount.  The note is due March 2004, but is
  expected to be redeemed or converted into common stock by the note holder prior to maturity if
  not redeemed earlier by Covol.  Interest is payable semiannually on January 1 and July 1.  The
  note is collateralized by license fees payable to Covol from the production and sale of
  synthetic fuel from four synthetic fuel facilities located in Virginia and West Virginia.                   --        10,265

  Convertible  secured note payable to a Covol shareholder issued at a discount, bearing a stated
  interest rate of 8% on the $850 face amount.  The note is due March 2001, but may be converted
  into common stock by the note holder prior to maturity  if not  redeemed  earlier by Covol.
  Interest  is payable  quarterly beginning December 1999. The note is collateralized by license
  fees payable to Covol from the production and sale of synthetic fuel from a synthetic fuel
  facility.                                                                                                  ---           622

  Note payable to a corporation, bearing interest at 14% payable monthly.  $1,000 of principal
  was paid in January 2000 and $3,000 of principal is due April 2000.  Collateralized by a
  promissory note receivable and by certain future license fees receivable by Covol.  A member of
  Covol's Board of Directors is affiliated with this corporation.                                          4,000         4,000

  Note payable to the same corporation referred to in the preceding paragraph, bearing interest
  at 14%, paid in March 1999.                                                                              4,000           ---

  Note payable to a corporation, bearing interest at 15%,  paid in August 1999 (see Note 15).              5,800           ---

  Other                                                                                                       94           722
                                                                                                    ------------- -------------
                                                                                                          35,979        38,513

       Less: current portion                                                                             (22,049)      (20,626)
                                                                                                    ============= =============
       Total non-current                                                                                 $13,930       $17,887
                                                                                                    ============= =============
</TABLE>
                                      F-15
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Convertible Secured Note Payable

   The $20,000,000  convertible  secured note payable listed above is redeemable
   by Covol at any time prior to  September  17, 2001 for an amount equal to the
   face amount of the debt.  The debt is redeemable by Covol from  September 18,
   2001 and prior to March 17,  2002 for an amount  equal to 109.85% of the face
   amount of the debt. The debt is convertible into common stock of Covol at the
   option of the  noteholder  at a discount  to the market  price at the time of
   conversion as described  below.  The debt is  convertible by the holder after
   March  17,  2002,  except  upon the  occurrence  of an event of  default.  If
   converted, the number of shares into which the debt can be converted would be
   calculated  based on a price per share of  common  stock  equal to 33% of the
   then  market  price at the time of  conversion,  but not less than  $6.67 per
   share nor more than $10.00 per share. Covol's present intent is to redeem the
   debt prior to March 17, 2002,  assuming  sufficient  cash from  operations is
   available.

   A deferred asset was recorded for the portion of financing costs allocated to
   the debt.  This  asset is being  amortized  over 36 months,  the most  likely
   period  of time  over  which  the debt is  expected  to  remain  outstanding.
   Amortization is computed using the effective interest method. Paid-in capital
   was credited for the relative value of the warrants  directly  related to the
   issuance of debt and the  warrants  allocated  to the  issuance  of debt,  as
   compared  to the total  combined  fair  values of the  warrants  and debt.  A
   liability  was  recorded  for  $21,970,000,  109.85% of the face value of the
   debt, and debt discount of approximately  $13,300,000 was recorded to yield a
   level interest rate on the net amount of debt  outstanding  between the issue
   date and 36 months  from the issue date.  Each  period,  interest  expense is
   recorded  consisting of the total of i) interest  expense based on the stated
   interest  rate  and the face  value of the  debt;  ii)  amortization  of debt
   discount; and iii) amortization of debt issue costs.

   Covol will be in default of the  provisions of the debt  agreement if certain
   events occur. These events include, in addition to events commonly considered
   defaults,  failure  of  the  shareholders  to  approve  the  issuance  of the
   convertible  debt by March 31,  2000 (see  Note  16),  incurring  one or more
   judgments in excess of $5,000,000, which judgments are not discharged, stayed
   or otherwise  satisfied  within 30 days of the judgments,  and the failure to
   meet certain  earnings  targets.  The earnings targets apply initially to the
   quarter ending December 31, 1999, and then to subsequent  quarterly  periods.
   Consolidated earnings of $5,000,000,  as defined in the applicable agreement,
   are  required  for the  quarter  ending  December  31,  1999.  In  subsequent
   quarters,  earnings targets  increase  incrementally up to $6,500,000 for the
   quarter  ending  December  31,  2001  and  subsequent  quarters.   There  are
   provisions  for the  carryover  of  earnings  which  exceed  the  targets  to
   subsequent quarters, if necessary,  subject to certain limitations.  The debt
   is  collateralized  by license fees payable to Covol from the  production and
   sale of  synthetic  fuel from  four  synthetic  fuel  facilities  located  in
   Virginia and West Virginia.

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

   So long as any of this debt or any of  Covol's  series D  preferred  stock is
   outstanding, the holders have the right, as a group, to elect one director to
   Covol's  Board  of  Directors.   Payments  of  dividends  and  certain  other
   transactions require approval of the holders.

   Collateral, Interest Rates and Debt Maturities

   Substantially all of Covol's property,  plant and equipment,  facilities held
   for sale and license  fees payable to Covol from the  production  and sale of
   synthetic  fuel  from  owned  and  licensed  synthetic  fuel  facilities  are
   collateral for notes  payable.  The weighted  average  interest rate on notes
   payable was 8.5% at September 30, 1998 and 7.9% at September 30, 1999. Future
   maturities of notes payable as of September 30, 1999 are as follows:

         Year ending September 30,      (thousands of
                                           dollars)
         --------------------------- ---------------------
                    2000                          $20,626
                    2001                            7,587
                    2002                              129
                    2003                               63
                    2004                           22,000
                 Thereafter                            41
                                     ---------------------
         Subtotal                                  50,446
         Unamortized discount                     (11,933)
                                     =====================
         Net carrying value                       $38,513
                                     =====================

                                      F-16
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Notes Payable - Related Parties

   Notes  payable - related  parties  represents  unsecured  amounts  due to two
   officers of Covol  bearing  interest at prime plus 2%.  Principal and accrued
   interest were paid in April 1999.

   Deferred Compensation

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

   Interest Costs

   During 1997, Covol incurred total interest costs of approximately  $2,023,000
   (including  approximately  $1,429,000 of non-cash  interest expense resulting
   from  issuance of  convertible  debt at a discount),  of which  approximately
   $378,000 was capitalized. During 1998, Covol incurred total interest costs of
   approximately  $4,135,000  (including  approximately  $2,046,000  of non-cash
   interest expense  resulting from issuance of convertible debt at a discount),
   of  which  approximately  $1,390,000  was  capitalized.  During  1999,  Covol
   incurred  total  interest  costs  of  approximately   $6,253,000   (including
   approximately   $2,075,000  of  non-cash   interest  expense  resulting  from
   amortization  of debt  discount and debt issuance  costs),  none of which was
   capitalized.

7. Preferred Stock

   Preferred Series A - Non-Voting

   As of September 30, 1999, there were 3,000 shares of Series A preferred stock
   issued and outstanding. The Series A preferred shares are non-voting and have
   the following  rights and privileges.  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 accumulate whether or not they have been
   declared  or whether  Covol has any  profits.  Additional  shares of Series A
   preferred stock may be issued in lieu of cash to pay accumulated dividends on
   these  shares.  Upon the  liquidation  of Covol,  the holders of the Series A
   preferred shares are entitled to receive $1,000 per share,  together with all
   accumulated  and unpaid  dividends,  if any. Each share of Series A preferred
   stock includes a warrant to purchase 28.571 shares of common stock or a total
   of  85,713  shares,  at a price of $8.00 per  share.  These  warrants  had an
   original  expiration date in August 1999, but were  subsequently  extended to
   December 2000. The holders of the shares are entitled to convert their shares
   to common shares at any time. The number of common shares to be received upon
   conversion  is determined by  multiplying  the number of preferred  shares by
   $1,000 and dividing by the conversion price of $7.00 per share. Covol 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, 1999.  Dividends in arrears at September  30, 1999 totaled  approximately
   $381,000, or $126.90 per share.

   Preferred Series B - Non-Voting

   As of  September  30,  1999,  there were 14,310  shares of Series B preferred
   stock  issued and  outstanding.  There were  312,882  shares  outstanding  at
   September 30, 1998 of which 298,572  shares,  along with related  accumulated
   but undeclared dividends, were converted into approximately 323,000 shares of
   common stock during 1999.  The Series B preferred  shares are  non-voting and
   have the  following  rights  and  privileges.  The  holders of the shares are
   entitled to cumulative  dividends at the rate of approximately 7% per year of
   the liquidation value of $7 per share. These dividends  accumulate whether or
   not they have been  declared  or whether  Covol has any  profits.  Additional
   shares  of  Series B  preferred  stock  may be  issued in lieu of cash to pay
   accumulated  dividends on these shares.  Upon the  liquidation of Covol,  the
   holders  of the Series B  preferred  shares  are  entitled  to receive $7 per
   share, together with all accumulated and unpaid dividends,  if any. Each unit
   (comprising  3 shares)  of Series B  preferred  stock  includes  a warrant to
   purchase  one share of  common  stock at a price of $8.00  per  share.  These
   warrants expired in September 1999. 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.  Accumulated  dividends  may be
   converted  by Covol into common  stock at the  conversion  price of $7.00 per
   share. No dividends have been declared through September 30, 1999.  Dividends
   in arrears at September 30, 1999 totaled approximately  $14,000, or $1.01 per
   share.  Based upon the conversion price per share at the date of issuance,  a
   non-cash dividend of approximately $165,000 was imputed upon issuance.

                                      F-17
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Preferred Series C - Non-Voting

   As of September 30, 1999,  there were 200 shares of Series C preferred  stock
   issued and  outstanding.  There were no shares  outstanding  at September 30,
   1998.  1,000 shares were issued in January 1999,  of which 800 shares,  along
   with related  accumulated  but  undeclared  dividends,  were  converted  into
   approximately  279,000  shares of common stock during 1999. In November 1999,
   the  remaining  200 shares,  along with related  accumulated  but  undeclared
   dividends,  were converted into approximately 189,000 shares of common stock.
   Warrants for the purchase of approximately 73,000 shares of common stock were
   issued in connection with the issuance of the preferred  stock.  The warrants
   are exercisable  until July 2001 at an exercise price of $6.88 per share. The
   exercise  deadline for certain other warrants with an exercise price of $7.00
   per share held by this  stockholder  was  extended  to June 2000 and  certain
   additional  warrants  with  an  exercise  price  of  $30.00  per  share  were
   relinquished  and  canceled.  The new and  extended  warrants  were valued at
   approximately $500,000.  Covol granted registration rights for the restricted
   common  shares  issuable  upon  conversion  of the  preferred  stock  or upon
   exercise of the common stock  warrants.  Based upon the conversion  price per
   share at the date of issuance, a non-cash dividend of approximately  $236,000
   was imputed upon issuance.

   Preferred Series D - Voting

   As of  September  30,  1999,  there were 60,000  shares of Series D preferred
   stock issued and  outstanding,  all of which were issued in March 1999. There
   were no shares  outstanding  at September 30, 1998.  This series of preferred
   stock is senior, with respect to dividend rights,  payments upon liquidation,
   or  redemption,  to all other  capital  stock of Covol,  including  the other
   series of preferred stock which are outstanding or which may be issued in the
   future.  Holders of the preferred  stock have voting rights as to all matters
   voted on by the holders of common stock and are entitled to one vote for each
   share of common stock  issuable upon  conversion of the preferred  stock.  In
   addition,  holders of the  preferred  stock and the  $20,000,000  convertible
   secured  note  payable  described  in  Notes 5 and 6 vote as a group  for one
   director.

   The holders of the shares are entitled to cumulative dividends at the rate of
   7% per  year of the  liquidation  value of $100 per  share.  These  dividends
   accrue  whether  or not they  have been  declared  or  whether  Covol has any
   profits and are payable  quarterly.  Additional  shares of Series D preferred
   stock may be issued in lieu of cash to pay accrued dividends on these shares.
   No dividends have been declared through September 30, 1999, but dividends are
   payable quarterly and approximately $123,000 was paid in July 1999. Dividends
   in arrears at September 30, 1999 totaled approximately $107,000, or $1.79 per
   share, which amount was paid in October 1999. Based upon the conversion price
   per share at the date of  issuance,  a  non-cash  dividend  of  approximately
   $667,000 was imputed upon issuance.

   Upon the liquidation of Covol,  the holders of the Series D preferred  shares
   are entitled to receive $125 per share,  together with all accrued and unpaid
   dividends,  if any.  The  preferred  stock is  redeemable  at Covol's  option
   through  March  17,  2002  at  125%  of its  liquidation  value,  subject  to
   adjustment  for changes in the value of Covol's  common stock.  The preferred
   stock is  redeemable  at the option of the  preferred  stockholder  only upon
   occurrence  of a change in  control  or an event of  default.  The  number of
   shares of common  stock  into which the  preferred  stock is  convertible  is
   determined by multiplying the number of preferred shares by $100 and dividing
   by the lesser of $5.25 or 90% of the market value of Covol's  common stock on
   the date of conversion.  On March 17, 2002, all  outstanding  preferred stock
   automatically converts to common stock.

   During  November and December 1999,  15,202  preferred  shares were converted
   into approximately 1,604,000 shares of common stock.

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

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

   (thousands of dollars and shares)                                                                  1998          1999
   ---------------------------------------------------------------------------------------------- ------------- --------------

<S>                                                                                              <C>              <C>
   Note receivable from a stockholder,  $5,000 face amount,  bearing interest at
   6%,  renegotiated  in November  1997,  principal  and interest of $515 due in
   annual  installments  beginning  January  1999  through  January  2004,  with
   remaining balances due January 2005,  collateralized by 150 shares of Covol's
   common  stock held by Covol,  options  expiring in January 2006 to acquire 25
   shares of Covol's common stock committed by the stockholder to be provided to
   Covol,  and a personal  guarantee of the  stockholder.  The carrying value is
   equal to the fair value of the 150  shares  and  options to acquire 25 shares
   and is net of unamortized  discount after  renegotiation of $1,281 based upon
   an imputed rate of 10.25%, and an allowance for impairment of $2,129 in 1997,
   $2,110 in 1998, and $3,319 in 1999. Interest income of $515 was recognized in
   1999. No interest income was recognized during 1997 or 1998.                                        $1,609            $400

                                      F-18
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   Notes and  interest  receivable  from 16  current  and  former  officers  and
   employees,  issued upon  exercise of options to purchase 450 shares of common
   stock at $5.31 to $8.38 per share,  bearing  interest at 5.7%,  principal and
   interest due in December 2000, collateralized by 900 shares of Covol's common
   stock. No interest income was recognized during 1998 or 1999.                                        5,492           5,492

   Notes  receivable  from seven  officers of Covol,  bearing  interest at prime
   (8.25% at  September  30,  1999) plus 2%,  principal  and interest due August
   2000,   originally   collateralized  by  partnership   interests  which  were
   subsequently exchanged for 79  shares of Covol's  common stock (see Note 13).
   No interest income was recognized during 1997, 1998 or 1999.                                            672            672
                                                                                                  ============= ==============
                                                                                                        $7,773         $6,564
                                                                                                  ============= ==============
</TABLE>

9. Fair Value of Financial Instruments

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

         *  Cash and cash equivalents

         *  Receivables

         *  Notes  receivable,   including   facility   transferred  under  note
            receivable arrangement

         *  Notes payable

         *  Notes   receivable  -  related   parties,   from   issuance  of,  or
            collateralized by, common stock

   A substantial  portion of Covol's  financial  instruments are of a short-term
   nature.  Accordingly,  while  the  fair  values  of  some  of the  individual
   financial instruments vary somewhat from their carrying values, the aggregate
   carrying  values as reflected in the  consolidated  financial  statements for
   1998 and 1999  approximated  fair  value,  with the  exception  of the  notes
   payable in 1999 for which the aggregate market value approximated $42,300,000
   at September 30, 1999.

10. Stock Options and Warrants

   Stock Options

   At September  30, 1999,  Covol had one stock option plan (the "Option  Plan")
   under  which  2,400,000  shares of common  stock are  reserved  for  ultimate
   issuance.  A committee of Covol's Board of  Directors,  or in its absence the
   Board (the  "Committee"),  administers  and interprets the Option Plan.  This
   Committee  is  authorized  to grant  options and other  awards both under the
   terms of the Option Plan and  outside the Option Plan to eligible  employees,
   officers,  directors,  and consultants of Covol. The Option Plan provides for
   the granting of both incentive stock options and non-statutory stock options.
   Terms  of  options   granted  under  the  Option  Plan,   including   vesting
   requirements,  are  determined by the  Committee.  Options  granted under the
   Option Plan vest over periods ranging up to ten years,  expire ten years from
   the date of grant and are not transferable  other than by will or by the laws
   of descent and  distribution.  Incentive  stock  option  grants must meet the
   requirements of the Internal Revenue Code.

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

   When  options  are issued  with terms  considered  compensatory,  the related
   compensation  expense is  amortized  to expense  over the  specified  vesting
   period on a straight-line  basis.  Deferred  compensation  related to options
   that vest over time was  approximately  $1,178,000 for options issued in 1997
   and $0 for options issued in both 1998 and 1999.  The amortized  compensation
   expense  related  to  compensatory  options  was  approximately   $1,572,000,
   $908,000 and $2,553,000 for 1997, 1998 and 1999,  respectively.  Compensation
   expense  related  to  options  that  vested   immediately  was  approximately
   $103,000, $127,000 and $0 for 1997, 1998 and 1999, respectively.

                                      F-19
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

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

  (thousands of dollars, except per-share data)                                    1997             1998            1999
  --------------------------------------------------------------------------- ---------------- --------------- ---------------
<S>                                                                               <C>             <C>             <C>
  Net loss attributed to common stockholders -- reported                            $(10,687)       $(11,645)       $(29,704)
                                             -- pro forma                            (11,302)        (14,567)        (32,969)
  Basic and diluted net loss per share -- reported                                     (1.32)          (1.17)          (2.39)
                                       -- pro forma                                    (1.40)          (1.46)          (2.65)
</TABLE>

   The  fair  value  of  each  stock  option  grant  was  determined  using  the
   Black-Scholes  option pricing model and the following  assumptions:  expected
   stock price  volatility  of .50 to .70,  risk-free  interest  rate of 4.4% to
   7.8%,  weighted  average  expected  option  lives  of 5 -  10  years  and  no
   dividends.  The Black-Scholes option valuation model was developed for use in
   estimating   the  fair  value  of  traded   options  which  have  no  vesting
   restrictions and are fully transferable. In addition, option valuation models
   require the input of highly subjective  assumptions  including expected stock
   price  volatility.   Because  Covol's  stock  options  have   characteristics
   significantly  different from those of traded options, and because changes in
   the subjective  input  assumptions  can materially  affect the fair value, in
   management's  opinion,  the  existing  models  do not  necessarily  provide a
   reliable single measure of the fair value of stock options.

   The  following  table is a  summary  of  activity  for all of  Covol's  stock
   options,  including  options not granted under the Option Plan, for the years
   ended September 30:
<TABLE>
<CAPTION>
                                                         1997                       1998                      1999
                                              --------------------------- ------------------------- --------------------------
                                                              Weighted                  Weighted                   Weighted
                                                              Average                    Average                   Average
                                                              Exercise                  Exercise                   Exercise
  (thousands of shares)                          Shares        Price        Shares        Price        Shares       Price
  ------------------------------------------- ------------- ------------- ------------ ------------ ------------ -------------
<S>                                             <C>           <C>          <C>         <C>           <C>           <C>
  Outstanding at beginning of year                   1,367         $1.62        1,614       $ 2.85        2,370         $6.29
     Granted                                           445          6.08          850        12.34          667          5.40
     Exercised                                         (73)         1.84          (94)        1.93          (30)         1.50
     Canceled                                         (125)         1.50          ---          ---          (36)         2.34
                                              ============= ============= ============ ============ ============ =============
  Outstanding at end of the year                     1,614         $2.85        2,370       $ 6.29        2,971         $6.18
                                              ============= ============= ============ ============ ============ =============
  Exercisable at end of year                           712         $2.04        1,038        $5.23        1,801         $5.23
                                              ============= ============= ============ ============ ============ =============
  Weighted average fair value of options
  granted during the year below market                             $9.53                    $10.21                        n/a

  Weighted average fair value of options
  granted during the year at market                                $5.57                     $9.91                      $2.93

  Weighted average fair value of options
  granted during the year above market                               n/a                       n/a                      $2.92
</TABLE>

                                      F-20
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   The  following  table   summarizes   information   about  all  stock  options
   outstanding at September 30, 1999:
<TABLE>
<CAPTION>

   (thousands of shares)                        Options Outstanding                               Options Exercisable
   ------------------------ ------------------------------------------------------------- ------------------------------------
                                                        Weighted
                                   Number               Average            Weighted            Number            Weighted
                               Outstanding at          Remaining            Average        Exercisable at        Average
      Range of Exercise         September 30,       Contractual Life       Exercise         September 30,        Exercise
           Prices                   1999                in Years             Price              1999              Price
   ------------------------ ---------------------- ------------------- ------------------ ------------------ -----------------
<S>                            <C>                     <C>                 <C>              <C>                    <C>
            $1.50 to $2.50                  1,159                 6.5             $ 1.58                982            $ 1.60
            $4.13 to $9.00                  1,060                 8.6               6.44                524              7.66
          $11.00 to $13.56                    752                 8.6              12.93                295             13.00
                            ----------------------                                        ------------------
                                            2,971                                                     1,801
                            ======================                                        ==================
</TABLE>

   Stock Warrants

   As of September 30, 1999, there were warrants outstanding for the purchase of
   approximately  3,126,000  shares of common stock at prices ranging from $3.50
   to $20.00 per share and with  expiration  dates from  November  1999 to March
   2004. All of these warrants were issued in connection with private placements
   of common and preferred  stock or notes payable during the years 1997 through
   1999 (see Note 5).

   In October 1998,  Covol issued warrants for the purchase of 100,000 shares of
   common stock pursuant to the terms of the outstanding $4,000,000 note payable
   to a corporation  described in Note 6. Also,  certain other  warrants for the
   purchase of common stock have been repriced and / or the exercise  period has
   been  extended  in order to meet the terms of  various  agreements  Covol has
   entered into.

11. Basic and Diluted Loss per Share
<TABLE>
<CAPTION>
  (thousands of dollars and shares, except per-share data)                         1997             1998            1999
  --------------------------------------------------------------------------- ---------------- --------------- ---------------
  Numerator:
<S>                                                                                 <C>             <C>             <C>
     Net loss                                                                       $(10,498)       $(11,308)       $(28,393)
     Preferred stock dividends (undeclared)                                              (24)           (337)           (466)
     Imputed preferred stock dividends                                                  (165)            ---            (845)
                                                                              ================ =============== ===============
     Net loss attributable to common stockholders                                   $(10,687)       $(11,645)       $(29,704)
                                                                              ================ =============== ===============

  Denominator - weighted-average shares outstanding                                    8,080           9,969          12,418
                                                                              ================ =============== ===============

  Basic and diluted loss per common share                                             $(1.32)        $(1.17)          $(2.39)
</TABLE>

   Imputed  preferred  stock  dividends are calculated  based upon the amount by
   which the price of Covol's common stock exceeds the  conversion  price at the
   date convertible preferred shares are issued.

12. Income Taxes

   Covol  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." Covol files a consolidated tax return with its
   100% owned  subsidiaries.  The  majority-owned  limited  partnerships  file a
   separate tax return, as required.

   As of September  30, 1999,  Covol has net  operating  loss  carryforwards  of
   approximately  $43,750,000 which can be used to offset future taxable income.
   The net operating loss carryforwards expire from 2005 to 2019. Covol also has
   approximately  $190,000 in research and development tax credit  carryforwards
   which  can  be  used  to  offset  future  tax  liabilities.  The  tax  credit
   carryforwards   expire  from  2007  to  2013.   The   utilization   of  these
   carryforwards  against  future taxable income may become subject to an annual
   limitation due to changes in ownership of Covol's common stock.

                                      F-21
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   The provision for income taxes for the years ended  September 30, 1997,  1998
   and  1999  differs  from the  statutory  federal  income  tax rate due to the
   following:
<TABLE>
<CAPTION>
  (thousands of dollars)                                                           1997            1998           1999
  --------------------------------------------------------------------------- --------------- --------------- --------------
<S>                                                                                <C>             <C>           <C>
  Tax benefit at statutory rates                                                      $3,738          $1,355        $ 9,653
  Change in valuation allowance                                                       (3,840)         (1,377)       (10,573)
  State income taxes, net of federal tax effect                                          101              39            936
  Other, including redetermination of prior years' tax estimates                           1             (17)           (16)
                                                                              --------------- --------------- --------------
     Federal income tax provision                                                      $   0           $   0          $   0
                                                                              =============== =============== ==============
</TABLE>

   The  components  of the net deferred  tax asset as of September  30, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
  (thousands of dollars)                                                                          1998            1999
  ------------------------------------------------------------------------------------------- -------------- ---------------
  Deferred tax assets (liabilities):
<S>                                                                                              <C>           <C>
     Net operating loss carryforwards                                                                $7,995        $ 16,319
     Research and development tax credit carryforwards                                                  189             189
     Compensation expense related to common stock options                                             2,084           2,989
     License fee revenue recognition                                                                    315             400
     Write-down of notes receivable                                                                     304           1,156
     Estimated liabilities                                                                              356             282
     Depreciation                                                                                       (88)            378
     Other                                                                                               40              55
                                                                                              -------------- ---------------
          Total deferred tax assets                                                                  11,195          21,768
     Valuation allowance                                                                            (11,195)        (21,768)
                                                                                              -------------- ---------------
          Net deferred tax asset                                                                      $   0           $   0
                                                                                              ============== ===============
</TABLE>

   The valuation  allowance  increased by $10,573,000 during 1999,  representing
   the  additional  amount of  deferred  tax assets at  September  30,  1999 not
   considered  recoverable through the reversal of taxable temporary differences
   or the generation of future taxable income. The valuation allowance increased
   by  $1,377,000  during  1998 and by  $3,840,000  during  1997.  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.
   Covol'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 Covol has not  generated  significant
   revenues to date,  Covol  believes that a valuation  allowance of $21,768,000
   should be provided as of September 30, 1999.  This estimate may change in the
   near term  depending on the level of earned license fees received in 2000 and
   on the consummation of selling the assets held for sale.

13. Purchase of Limited Partners' Interests in Subsidiaries

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

   Covol  recorded this exchange using the market values of Covol's common stock
   on the dates the limited partners tendered acceptance of Covol's offer. These
   market  values ranged from $6.75 to $11.13 per share.  Approximately  610,000
   shares of common  stock  were  issued in these  transactions.  Subsequent  to
   September 30, 1999, Covol reached an agreement  settling several  outstanding
   issues with the  remaining  limited  partner of Alabama  Synfuel #1 following
   which  Alabama  Synfuel #1 became a  wholly-owned  subsidiary  of Covol.  The
   carrying value of the intangible asset recorded in the exchange transactions,
   net of accumulated  amortization,  was approximately  $2,786,000 at September
   30, 1999.

                                      F-22
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

14. Asset Write-offs and Other Non-recurring Charges

   In May 1995,  Covol  entered into an agreement  with Geneva Steel  Company to
   build and operate a synthetic fuel briquetting  facility.  The facility never
   reached commercial  operating levels, but was held for other uses,  including
   potential  relocation to another site for use in the  production of synthetic
   fuel or in  other  applications.  In early  1999,  Geneva  filed a  voluntary
   petition for relief under Chapter 11 of the United States Bankruptcy Code due
   to a lack of sufficient liquidity. Primarily as a result of this event, Covol
   moved a substantial portion of the equipment comprising the facility from the
   Geneva  site to  another  location  where  it is  being  used in a  different
   application  of  Covol's  technology.  Certain  assets  at the  Geneva  site,
   primarily  consisting  of leasehold  improvements  on the property  where the
   facility was located,  were  abandoned.  The carrying  value of these assets,
   totaling approximately $556,000, was written off during 1999.

   During 1997,  Covol  entered  into an  agreement  to purchase  coal fines for
   feedstock for two synthetic  fuel  facilities in Utah.  Beginning in 1997 and
   continuing  through  May 1999,  Covol made  payments  totaling  approximately
   $3,917,000,  of which $240,000 was  transferred  to cost of coal  briquetting
   operations.  The net amount paid was  recorded  as  advances on  inventories.
   Quarterly   payments  of  approximately   $396,000  are  required  under  the
   agreement.  The agreement  provides for total payments of $5,500,000  between
   February  1997 and May 2000 for the  removal of 2 million  tons of coal fines
   (at a price of $2.75 per ton) from the property.  The agreement also provides
   for  removal of an  additional  500,000  tons at $2.75 per ton. No payment is
   required for removal of any coal fines in excess of 2.5 million  tons.  Covol
   entered into the contract based on its understanding  that the other party to
   the  agreement  (the  "Seller")  was the owner of the property and that there
   were in excess of 2 million tons of  recoverable  coal fines on the property.
   Subsequently,  Covol  learned that a third party  disputes that the Seller is
   the owner of the property,  and that there may be  substantially  less than 2
   million tons of recoverable  fines on the property.  Consequently,  in August
   1999,  Covol  notified  the Seller that unless the Seller  could  procure and
   provide evidence that it could warrant title to the property and would adjust
   contract  payments to reflect the actual  recoverable  fines at the property,
   Covol may elect to terminate the contract and seek  appropriate  damages.  On
   this  basis,  Covol has  refused to make  further  quarterly  payments to the
   Seller under the contract. The Seller responded by denying Covol's claims and
   alleging  issues of property  reclamation  and  bonding  and failed  contract
   payment. Covol denies these allegations.  The dispute is in an early stage of
   litigation  and  resolution  is  uncertain.   Based  on  the  uncertainty  of
   recovering  the net  advances  paid through  litigation,  Covol wrote off the
   entire $3,677,000 of advances on inventories in the fourth quarter of 1999.

   In addition to the above  charges,  in the fourth quarter of fiscal year 1999
   Covol wrote off a $660,000  note  receivable  and  recorded a  liability  for
   approximately  $469,000 related to a settlement agreement with a company that
   had provided  Covol with advise with respect to the use of certain  synthetic
   fuel technology, certain financing obtained and the sale of certain synthetic
   fuel manufacturing facilities.

   These write-offs and the settlement provision total approximately $5,362,000,
   which amount is recorded as asset write-offs and other non-recurring  charges
   in the consolidated statement of operations.

15.Sale of Facilities

   In 1998,  Covol sold a synthetic fuel facility  located in Alabama on which a
   loss of $218,000 was  recognized.  The sales price was $6,500,000  payable in
   the form of a nonrecourse  promissory note collateralized by certain portions
   of the facility.

   In 1999,  Covol sold a facility  located in  Pennsylvania  on which a loss of
   approximately $1,839,000 was recognized.  The sales price consisted of a cash
   payment to Covol of  $1,250,000,  assumption of $5,000,000 of facility  debt,
   completion of capital  improvements to the facility and an eight-year royalty
   arrangement  with  both  Covol and the  construction  lender.  Covol  remains
   contingently  liable for $800,000 of the facility  debt which  liability  has
   been recorded in accrued  liabilities  in the  consolidated  balance sheet at
   September 30, 1999.  Covol entered into an agreement in which it operates the
   facility on behalf of the buyer.  Covol also entered into its standard supply
   agreements.  Covol can receive  additional  cash payments in the form of both
   accelerated  and increased  royalties  upon  obtaining  firm  synthetic  fuel
   "off-take"  agreements  in excess of 100,000 tons per year and  operating the
   facility at rated  capacity for a ten-day  period.  Covol must achieve  these
   performance  milestones  by June 30,  2000.  The maximum  amount  under these
   provisions of approximately

                                      F-23
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   $9,700,000 is achieved if "off-take" agreements to sell 360,000 tons per year
   are put in  place  for the  synthetic  fuel  production  of the  facility  in
   addition  to the ten-day  operations  period.  Further,  Covol can receive an
   additional  $4,000,000  payment if the facility  operates at 115% of capacity
   for a three-month  period in any  consecutive  three months prior to December
   31, 2001.  Covol will recognize  revenue and a  corresponding  gain under the
   royalty  arrangement upon receipt of the royalty payments and for achievement
   of performance milestones.

   Covol also sold a synthetic  fuel  facility in December  1999,  as more fully
   described in Note 17.

   16. Commitments and Contingencies

   Commitments  and  contingencies  as  of  September  30,  1999  not  disclosed
   elsewhere, are as follows:

   Leases

   Rental expense was approximately $318,000, $480,000, and $1,309,000 for 1997,
   1998 and 1999,  respectively.  Covol has noncancellable  operating leases for
   equipment and for real estate. At September 30, 1999, minimum rental payments
   due under these leases, are as follows:

                        Year ending September 30:    (thousands of dollars)
                       ----------------------------- -----------------------
                                   2000                       $401
                                   2001                        222
                                   2002                         89
                                   2003                         41
                                   2004                          8
                                                     =======================
                                                              $761
                                                     =======================

   Letters of Credit

   Covol has entered into arrangements with a bank that provide for the issuance
   of  letters  of  credit  totaling  up to  $698,000.  These  arrangements  are
   collateralized by certificates of deposit totaling  approximately $588,000 in
   1998 and $460,000 in 1999 that are included in restricted  investments in the
   accompanying  consolidated balance sheet. As of September 30, 1999, there was
   approximately $536,000 of liabilities covered by these arrangements.

   Legal or Contractual Matters

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

   In March 1997, Covol transferred the Utah Synfuel #1 facility to Coaltech. In
   connection with this  transaction,  Utah Synfuel #1 licensed  Coaltech to use
   Covol's  binder  technologies  for a  non-refundable  advance  license fee of
   $1,400,000,  which is being recognized as income over the contractual term of
   the license  agreement of 2007,  and a recurring  license fee that is payable
   quarterly and that is based upon synthetic fuel produced and sold at the Utah
   facility by Coaltech.  Covol contracted with Coaltech to operate the facility
   for which Covol  receives a quarterly fee, which is also based upon synthetic
   fuel  produced  and sold.  The limited  partners  of Coaltech  have an option
   wherein they can require  Covol to  repurchase  this  facility  under certain
   conditions.  This  put  option  can be  exercised  if 1) none of the  limited
   partners are able to utilize the federal  income tax credits under Section 29
   of the tax code, 2) the economic  benefits  accruing to or experienced by all
   of the Coaltech limited partners differ significantly from what was initially
   projected,  or 3) there is a permanent  force  majeure or material  damage or
   destruction  of the Utah  facility.  If the put option is exercised  prior to
   March 2000,  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
   paid to Covol by Coaltech.  If the put option is exercised  after March 2000,
   the  option  price  will  be  $10.  In  accordance  with  generally  accepted
   accounting  principles and after discussions with the staff of the Securities
   and Exchange  Commission,  this  transaction has not been reflected as a sale
   for accounting purposes. The original cost of the facility less cash payments
   received from Coaltech,  is reflected in the consolidated  balance sheet as a
   facility transferred under note receivable arrangement.

   Additionally,  Covol  entered  into a  supply  and  purchase  agreement  with
   Coaltech  wherein  Covol  agreed  to  provide  to  Coaltech  coal  fines  for
   processing into synthetic fuel at a price equal to Covol's cost. Covol agreed
   to purchase from Coaltech the synthetic  fuel  produced,  at Coaltech's  cost
   plus  one  dollar  per  ton.  As a  result  of this  commitment  to  purchase
   Coaltech's production, Covol has experienced losses related to the write-down
   of the  synthetic  fuel  purchased  to the  lower  of  cost or  market.  This
   write-down to date has  approximated 90% of the amount Covol has paid for the
   synthetic  fuel.  Based upon  expected  manufacturing  costs and current coal
   prices,  Covol  expects  to  incur a loss  under  this  supply  and  purchase
   agreement which will reduce the earned license fees received.  Covol believes
   that over the life of this arrangement, total earned license fees will exceed
   total losses incurred under the supply and purchase  agreement.  Also,  Covol
   believes  Coaltech  cannot require Covol to purchase  product for which Covol
   does not have third party sales,  limiting  such losses.

                                      F-24
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   However,  Covol and  Coaltech  are in  negotiations  to modify the  recurring
   license fee,  terminate the operating  contract,  settle the note receivable,
   and terminate the supply and purchase agreement (see Note 17).

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

   In January 1996, a manager of Covol entered property owned by Nevada Electric
   Investment  Company, a subsidiary of Nevada Power Corporation,  in connection
   with an offer by Covol to  purchase  the  property,  and with  certain  other
   employees of Covol, removed some asbestos over a two-day period. In May 1996,
   Covol received a notice of violation and order for compliance  from the State
   of Utah,  Division of Air  Quality  alleging  that  asbestos  was  improperly
   handled,  removed,  and  disposed of.  Covol  complied  with the order and in
   September 1996 entered into a settlement agreement with the State of Utah and
   paid a fine in the amount of $11,000.  In late 1997,  the U.S.  Environmental
   Protection  Agency began its own  investigation,  referring the matter to the
   U.S. Attorney's office which proceeded with a grand jury inquiry.  The former
   manager has entered into a  misdemeanor  plea bargain and the U. S.  Attorney
   has agreed that the plea  resolves  all criminal  matters  arising out of the
   incident.

   In September  1996,  Covol entered into an agreement with Coalco  Corporation
   whereby  Coalco was to advise Covol with respect to the financing and sale of
   certain  synthetic  fuel  manufacturing  facilities.  A dispute arose between
   Covol and Coalco about services  rendered or to be rendered by Coalco and the
   amount and timing for payment for such services.  A settlement was reached in
   November  1999 whereby Covol agreed to pay Coalco  $1,500,000  plus a royalty
   based on the synthetic fuel sold from five licensee-owned  facilities. Of the
   $1,500,000 to be paid, $479,000 was accrued as of September 30, 1999 and paid
   in November  1999.  An  additional  $279,000  was paid in  December  1999 and
   $470,000  is due and  payable  in  January  2000 as a result of the sale of a
   synthetic fuel facility in December 1999 (see Note 17). The remaining balance
   will be paid upon the  receipt  of cash  proceeds  from any  future  sales of
   synthetic fuel facilities held for sale. Pelletco, an affiliate of Coalco, is
   a licensee of Covol.

   In March 1999,  Covol  entered  into a financing  transaction  involving  the
   issuance of convertible  preferred stock and a convertible

                                      F-25
<PAGE>

                    COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                                   -----------

   secured  note (see  Notes 6 and 7). The  transaction  requires,  among  other
   things,  (1) stockholder  approval of the  transaction,  (2)  registration of
   common  stock into which the  securities  issued  may be  converted,  and (3)
   achievement  of earnings  targets  beginning in the first  quarter of Covol's
   fiscal  year  2000.  Covol is  preparing  for a  stockholder  meeting to seek
   approval of the financing transaction.  Covol filed the required registration
   statement on Form S-3 covering the March 1999 financing  transaction and such
   registration  statement has been declared  effective.  Failure to comply with
   this or other terms and conditions of these financing agreements could result
   in an increase  in the  interest  rate,  immediate  convertibility,  required
   escrow payments and possible immediate payment of outstanding amounts.

   Covol  is  negotiating  for the  sale  of two  synthetic  fuel  manufacturing
   facilities held for sale. Current negotiations  contemplate the relocation of
   those  facilities  by the  purchasers.  Covol  will  likely  incur  costs  in
   terminating  the  relationships  with the  current  facility  site owners and
   feedstock  providers.  In the case of the Pocahontas Synfuel facility,  Covol
   may incur up to $2.5  million to  terminate  the  relationship  with the site
   owner and feedstock supplier.  In the case of the Mountaineer Fuels facility,
   Covol may incur up to $3.25  million  to  terminate  the lease and  feedstock
   supply agreement.

   In February 1997,  Covol entered into a contract on a parcel of real property
   located near Price,  Utah, in which Covol  obtained  certain  possessory  and
   related  interests,  Covol's primary purpose being to obtain a source of coal
   fines to serve as feedstock for a nearby  synthetic fuel facility.  In August
   1999,  Covol sent a notice of default to Earthco,  alleging  that Earthco had
   breached a material  provision of the contract  because  Earthco did not have
   title to the  property.  Covol has refused to tender its August 1999  payment
   because of Earthco's  breach.  In addition,  Covol contends that the quantity
   and/or quality of  recoverable  coal fines was  substantially  less than what
   Covol had  understood  when  entering  into the  contract,  thereby  creating
   grounds to reform the terms of the contract.  Earthco subsequently  countered
   with allegations that Covol has breached its obligations  under the contract,
   including failure to make the August 1999 payment.

   In November 1999, Covol was served with a Complaint in litigation  pending in
   the Seventh  Judicial  District  Court of Carbon  County,  Utah titled Nevada
   Electric  Investment  Company  v.  Earthco,  et  al.  In the  Complaint,  and
   consistent  with  Covol's  position,   Nevada  Electric   Investment  Company
   ("NEICO")  alleges  that  it  is  the  lawful  owner  of  the  property  near
   Wellington,  Utah  described  in Covol's  lease from  Earthco.  NEICO seeks a
   declaratory  judgement  that  Covol  is not  entitled  to  possession  of the
   property due to the lack of ownership by Earthco.  The  Complaint  also seeks
   further relief from Earthco.  Covol received Earthco's Answer,  Counterclaims
   and Cross-claim in December 1999. Earthco's cross-claim against Covol alleged
   breach of  contract  and  requested  substantial  damages  in an amount to be
   proven at trial but  alleged to be in excess of $5  million.  Covol filed its
   Reply and  Cross-claim  against  Earthco in January  2000  denying  Earthco's
   claims and asserting  claims of  misrepresentation,  breach of lease,  unjust
   enrichment,  and related claims and for general and consequential  damages in
   an amount to be proven at trial. The disputes among Covol,  Earthco and NEICO
   are at an early stage and resolution is uncertain.

   Covol  intends  to  defend  against  claims  and  prosecute  its  own  claims
   vigorously.

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

   Employment Contracts

   Covol  has  entered  into  employment  agreements  with the  Chief  Executive
   Officer,  President, Chief Financial Officer and certain vice presidents. The
   agreements,   which  are  renewable  by  Covol,  generally  have  a  term  of
   approximately  three  years and  provide  for annual  salaries  and  benefits
   ranging  from  approximately   $87,000  to  $191,000  annually  per  officer,
   currently totaling  approximately  $1,100,000 for all officers combined.  All
   agreements provide for termination benefits under specific conditions.

17. Events Subsequent to September 30, 1999

   Events subsequent to September 30, 1999, not disclosed elsewhere, include the
   following.

   Coaltech Developments

   On October 29, 1999, Covol received notification from the limited partners of
   Coaltech  that they  were  effecting  a  retirement  of Covol as the  general
   partner of the partnership and were terminating Covol as operator of the Utah
   facility.  The limited  partners  also assert  that as a  consequence  of the
   retirement of Covol as general partner, Covol is deemed to have forfeited its
   1% interest in the Partnership. The notification demands that Covol indemnify
   the limited partners for all of their losses,  damages,  payments,  costs and
   expenses. Covol disputes the limited partners' demands.

   On December 1, 1999, the parties entered into negotiations and as a result an
   interim  standstill  agreement  was  reached  pursuant  to which the  limited
   partners and Covol have agreed not to pursue formal proceedings  against each
   other  pending  the  outcome of the current  settlement  negotiations.  It is
   likely that the outcome of these  negotiations  will result in  relocation of
   the Utah  facility to a new location  where it will be operated by one of the
   limited  partners and termination of contractual  and operational  activities
   between Covol and the limited  partners with settlement  payments  consistent
   with amounts reflected in the accompanying consolidated financial statements.
   Proceeds  from  this  settlement  will be used to repay the  $4,313,000  note
   payable due January 2000 to one of the limited  partners  (see Note 6). It is
   also  expected that the limited  partners  will  continue to purchase  binder
   materials  from  Covol  and  use  Covol's  technology  in the  production  of
   synthetic fuel when operations of the Utah facility are resumed.

   Sale of Facilities

   Effective  as of December  31,  1999,  Covol sold one of the three  remaining
   synthetic fuel facilities it owned. This facility was located in Price, Utah.
   Net cash proceeds to Covol after payment of certain debt  obligations will be
   approximately  $5,000,000.  Covol will report a gain on this  transaction  of
   approximately $5,300,000 in the period ended December 31, 1999.

   On January 13, 2000, Covol executed  definitive  agreements for the sale of a
   synthetic fuel facility  located in North Fork, West Virginia.  Funding under
   the  agreements  is expected to occur  within  several  days and will provide
   sufficient  funds  to  retire  the  debt  incurred  in  connection  with  the
   construction of the facility. The facility is expected to be relocated to the
   purchaser's site.  Additional funds,  equal to approximately 50% of the funds
   received at closing  are due to Covol when the  facility  reaches  commercial
   operations  at  the  new  location. Covol  will  provide  proprietary  binder
   materials used at this facility and will receive future  royalties based upon
   production and sale of synthetic fuel at the facility.

   Also,  on January 13, 2000,  Covol  executed a letter of intent with  a major
   U.S.  utility  company for the sale of the remaining  synthetic fuel facility
   owned by Covol. Covol believes execution of definitive agreements and funding
   of the sale will occur within 30 days.  Funds from the sale of this  facility
   will be  sufficient to  repay  the  debt  incurred  in the  construction  and
   operation of this facility, which debt has a due date of June 30, 2000.

   Impairment Charge

   Coaltech owns a synthetic  fuel facility on the same property as the facility
   that was sold.  As a result of the  anticipated  relocation  of the  facility
   owned by Coaltech,  combined with the sale of Covol's owned  facility and the
   Earthco  Complaint  (see Note 16), all of which  relate to the same  property
   site in Price,  Utah,  Covol also will record in the December  1999 period an
   impairment  charge of approximately  $12,000,000.  This impairment  charge is
   expected to consist of the  writedown of certain  plant and  equipment  which
   will remain on the site, having a net book value of approximately $10,000,000
   and a minimal  expected  salvage  value,  plus the writeoff of the intangible
   asset  related  to Utah  Synfuel  #1  recorded  in the  exchange  transaction
   described in Note 13, having a net book value of approximately $2,000,000.

                                      F-26
<PAGE>