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

FORM 10-K

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

(Mark One)

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

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

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

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

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

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

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

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

None

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant on December 15, 1997 was $96,571,353.

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference:

None.

TABLE OF CONTENTS

Page
PART I

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

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

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

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

PART II

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

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

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

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

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

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

PART III

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

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

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

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

PART IV

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

Statements in this Form 10-K, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors that
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in Item 1 and 7 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors.

PART I

ITEM 1. BUSINESS

The Company

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

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

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

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

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

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

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

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

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

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

Business of Company

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

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

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

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

Alabama Plant

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

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

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

Pursuant to a license agreement, BSF will pay quarterly royalty
payments at a prescribed dollar amount multiplied by the amount of British
thermal units ("Btu") in the product produced and sold during the calendar
quarter. The prescribed dollar amount is subject to adjustment based upon the
"inflation adjustment factor" as set forth in Section 29(d)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"). The amount to be paid is subject
to adjustment to the extent that BSF incurs an operating loss on the production
and sale of synthetic fuel (exclusive of the amount BSF pays as a license fee
for the use of the technology).

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

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

Utah Plant

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

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

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

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

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

The Company contracted with Coaltech to act as operator of the facility
for a quarterly fee based upon the amount of briquettes produced and sold per
year. The Company cannot predict with any certainty the amount of quarterly fees
that may be generated under its operation and maintenance agreement with
Coaltech. Moreover, the Company granted Coaltech a put option to require the
Company to purchase from Coaltech the Utah Project if (i) all of the Coaltech
limited partners are unable to utilize the federal income tax credits under
Section 29 of the Code, (ii) the economic benefits accruing to or experienced by
all of the Coaltech limited partners shall differ significantly from what was
initially projected, or (iii) there is a permanent force majeure or material
damage or destruction of the Utah Plant. If the put option is exercised prior to
the third anniversary date of the grant, the option price will be equal to the
fair market value of the limited partnership interests of the optionees on a
going concern basis, but in no event will the option price exceed 50% of the
capital contributions made by the optionees to fund payments due under the Utah
Note, the Utah License Agreement and broker fees. If the put option is exercised
on or after the third anniversary date, the option price will be $10 and the
optionees will not be entitled to any other payments.

As part of the sale of the Utah Plant, the Company and US #1 entered
into a Supply and Purchase Agreement with Coaltech. Under the agreement, the
Company agreed to provide coal fines to the Utah Plant for processing into
synthetic fuel at an amount equal to the Company's per ton costs (including any
wash costs). See discussion of wash plant below. Furthermore, US #1 agreed to
purchase from Coaltech the synthetic fuel produced at its cost plus one dollar
per ton. Coaltech has the right to market its synthetic fuel to a third party,
with US #1 having a right of first refusal to purchase such synthetic fuel. The
Company incurred a loss of $1,547,674 in the year ended September 30, 1997 in
connection with this agreement.

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

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

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

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

In order to provide coal fines to the Utah Plant, the Company entered
into a purchase agreement with Earthco to acquire the NEICO coal fines. See
"ITEM 1. BUSINESS--Supply of Coal Fines--NEICO Fines Purchase." The estimated
amount of clean coal fines equivalent at the NEICO site is 2 million tons. The
NEICO fines require washing to remove ash and to otherwise improve the quality
of the fines. Hence the Company is constructing of a wash plant at the NEICO
fines site. The estimated cost of the wash plant is approximately $4 Million.
The financing for the construction of the wash plant is being provided by
Gallagher, and is evidenced by a promissory note executed and delivered by the
Company to Gallagher which is secured by the property purchased with the
proceeds of the loan. The promissory note bears interest at 6% per annum with
principal and interest being due and payable in two years. As additional
consideration to Gallagher for financing the wash plant, the Company, in October
1997, agreed to grant Gallagher warrants to purchase approximately 400,000
shares of Company common stock, with fifty percent of the shares having a
purchase price of $10 per share and fifty percent of the shares having a
purchase price of $20 per share. The warrants are immediately exercisable and
expire in two years. The Company estimates that the wash plant will be
operational in January 1998 and will be able to process approximately 80 tons of
clean fines per hour. If the wash plant operates at expected capacity, it will
provide sufficient quality feedstock to operate the Utah Plant at its capacity.
As stated above, and in accordance with the Supply and Purchase Agreement with
Coaltech, the Company will provide the washed coal fines at its cost, which will
equal the amount paid under the NEICO Fines Purchase agreement plus washing
costs.

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

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

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

License Agreements

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

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

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

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

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

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

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

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

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

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

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

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

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

Joint Ventures

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

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

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

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

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

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

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

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

Other Construction Agreements

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

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

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

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

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

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

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

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

Indemnification to Centerline. In December 1996, the Company entered
into six indemnification agreements with Centerline whereby the Company agreed
to indemnify Centerline should it be required to pay liquidated damages to
PacifiCorp under various design and construction agreements for six coal
agglomeration facilities. See "ITEM 1. BUSINESS--Business of Company--License
Agreements--PacifiCorp." Under the original terms of the various design and
construction agreements, if the facilities are not completed by June 1, 1998
then $750,000 in liquidated damages for each facility would be due and payable
by Centerline. The indemnification agreement only applies if PacifiCorp actually
decides to build the facilities with Centerline as the design/builder.
PacifiCorp has elected to not build three of the projects, and therefore the
indemnity agreement with respect to those facilities will not longer apply.
Accordingly, the maximum amount of contingent liability to the Company under the
indemnification agreements is $2,250,000 ($750,000 per design and construction
agreement).

Supply of Coal Fines

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

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

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

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

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

Other Contracts

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

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

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

Briquetting Technology

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

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

Proprietary Protection

The Company has received four current United States patents and has one
United States patent application pending and two international patent
applications pending under the Patent Cooperation Treaty covering certain
aspects of the Briquetting Technology. There can be no assurance as to the scope
of protection afforded by the patents. Moreover, there are other industrial
waste recycling technologies in use and others may subsequently be developed,
which do (or will) not utilize processes covered by the patents or pending
patents. There can be no assurance that any patent issued will not be infringed
or challenged by other parties, infringe against patents held by other parties
or that the Company will have the resources to enforce any proprietary
protection afforded by the patent or defend against an infringement claim.

In addition to patent protection, the Company also relies on trade
secrets and know-how and employs various methods to protect the Briquetting
Technology. However, such methods may not afford complete protection and there
can be no assurance that others will not independently develop such know-how or
obtain access to the Company's know-how, concepts, ideas and documentation.
Since the Company's proprietary information is important to its business,
failure to protect its trade secrets may have a material adverse effect on the
Company.

Coke and Revert Material Briquettes

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

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

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

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

Research and Development

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

Construction and Limestone Businesses

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

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

Government Regulation

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

Failure to obtain necessary permits to construct and operate
briquetting plants could have a material adverse effect on the Company. Other
developments, such as the enactment of more stringent environmental laws and
regulations, could require the Company to incur significant capital
expenditures. If the Company does not have the financial resources or is
otherwise unable to comply with such laws and regulations, such failure could
also have a material adverse effect on the Company.

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

Tax Credits

Section 29 of the Code provides a credit (the "Section 29 Credit")
against the regular federal income tax, measured by unrelated party sales by a
taxpayer of qualified fuels, including solid synthetic fuel produced in the
United States from coal, the production of which is attributable to the
taxpayer. Where more than one person has an interest in a qualified facility,
the Section 29 Credits generated by the facility are allocated pursuant to the
proportional interests of such persons in the facility.

In order to be a solid synthetic fuel produced from coal for purposes
of the Section 29 Credit, the produced fuel must differ significantly in
chemical composition, as opposed to physical composition, from the alternative
substance used to produce it. The Company has received a PLR from the IRS in
which the IRS, based on representations made to it by the Company, agrees that
the Briquetting Technology results in a significant chemical change to coal
fines and transforms them into a solid synthetic fuel, and accordingly the IRS
concludes, based on the facts presented to it, that: (i) the Company, with the
use of its patented process, produces a "qualified fuel" within the meaning of
Section 29(c)(1)(C) of the Code; and (ii) assuming the other requirements of
Section 29 are met, the sale of the "qualified fuel" will entitle the Company to
claim the Section 29 Credit in the taxable year of sale. In its ruling, the IRS
noted that no temporary or final regulations pertaining to one or more of the
issues addressed in the PLR have been adopted and that the PLR will be modified
or revoked by the adoption of temporary or final regulations to the extent the
regulations are inconsistent with any conclusions in the PLR. The IRS notes,
however, that a PLR is not revoked or modified retroactively, except in rare and
unusual circumstances, provided certain criteria are satisfied, including that
(i) there has been no misstatement or omission of material facts, (ii) the facts
at the time of the transaction are not materially different from the facts on
which the PLR was based, (iii) there has been no change in the applicable law,
(iv) the PLR was originally issued for a proposed transaction and (v) the

taxpayer directly involved in the PLR acted in good faith in relying on the PLR,
and revoking the PLR retroactively would be to the taxpayer's detriment. The
Company received its PLR in September 1995. At least three other similar PLRs
have been obtained by third parties in connection with licenses of the Company's
technology. However, all PLRs are only binding with respect to the specific
projects addressed in the PLR and may only be relied on by the party that has
obtained the PLR.

The Section 29 Credit is subject to the passive activity rules of
Section 469, and therefore may not be available to individuals and closely held
corporations.

The Section 29 Credit is equal to $3.00 in 1979 dollars (or $5.95 in
1996 dollars) for each oil barrel equivalent ("OBE") of the qualifying fuel
produced and sold. This equates to approximately $20.00-$28.00 per ton of
synthetic fuel briquettes. The OBE is defined generally as an amount of fuel
having a 5.8 million Btu content. The Section 29 Credit allowed may not exceed
the taxpayer's regular tax liability reduced by certain other credits. The
credit cannot be utilized to offset the Alternative Minimum Tax.

The Section 29 Credit was designed to provide protection for qualifying
fuels against market price declines, and it is therefore subject to a phaseout
(under an annually adjusted formula) after the unregulated oil price reaches
specified levels. In 1996 dollars, the credit would have phased out had the
reference price for oil exceeded $46.62 per barrel, but the reference price
determined for 1996 was $18.46 and no phaseout occurred. There presently is no
reference price for 1997. The credit is also subject to reduction insofar as an
otherwise qualifying facility benefits from grants or subsidized financing
provided by federal, state or local governments, or from tax-exempt bond
financing.

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

During 1996, certain of the time periods applicable to the Section 29
Credit were extended. The Section 29 Credit will, under present law, be
available for sales of qualified fuels completed by December 31, 2007 to the
extent attributable to production from facilities placed in service by June 30,
1998, provided that such facilities are constructed pursuant to a binding
written contract in effect by December 31, 1996.

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

Competition

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

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

Employees

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

Confidentiality Provisions

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

Forward Looking Statements

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

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

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

ITEM 2. PROPERTIES

The Company leases an approximately 5,000 square-foot building in Lehi,
Utah, which houses its executive offices ("Corporate Headquarters"). The Company
previously owned its Corporate Headquarters. However, in August 1997, the
Company sold its Corporate Headquarters to Michael L. McEwan and Gerald M.
Larson ("Buyers") and entered into a triple-net lease with Buyers, dated August
1, 1997 (the "Headquarters Lease"). The Headquarters Lease provides for a
monthly rent of $5,000 during the initial term which expires on July 31, 2000.
Thereafter, the Lease will automatically extend indefinitely for successive
one-year periods at the sole option of the Company, and the monthly rent will
increase by 5% per year. The Corporate Headquarters were transferred to Buyers
as part of the settlement and closing between the Company and the Buyers for the
sale of the Construction Companies. See "ITEM 1. BUSINESS--Construction and
Limestone Businesses."

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

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

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

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

None.

PART II

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

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

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

The following table sets forth, for the periods presented, the high and
low bid quotations for the common stock as reported by National Quotation
Bureau, Inc. during the three most recent calendar years. The quotations do not
reflect adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. Since the Company has several market
makers, the bid prices among the different market makers will generally vary.
Accordingly, the bid price may not be representative of actual trades. The
following prices may not be considered valid indications of market value due to
the limited and sporadic trading in the shares of common stock.

Low Bid High Bid

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

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

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

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

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

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

Recent Sales of Unregistered Securities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As of September 30, 1997 and October 13, 1997, the Company accepted
subscriptions from 49 accredited investors for the purchase of 119,557 units
(the "Units") pursuant to a Confidential Private Placement Memorandum, dated
August 28, 1997 (the "Memorandum"), at a price of $35.00 per Unit with an
aggregate purchase price of approximately $4,200,000. Each Unit consisted of
five shares of common stock of the Company together with a warrant to purchase
one additional share of common stock. The exercise price of the warrant is $8.00
per share and the warrant must be exercised by April 30, 1998. Pursuant to the
terms of the Memorandum, the Company has granted to purchasers of the Units
piggyback registration rights on the shares of common stock underlying the Units
and the shares of common stock which have or may become issuable from the
exercise of the warrants. In connection with the sale of the Units under the
Memorandum, the Company has agreed to issue to three accredited investors finder
fees in the form of warrants to acquire an aggregate of up to 199,262 shares of
the Company's common stock at a purchase price of $8.00 per share at any time
prior to October 31, 1999. As of September 30, 1997, 350,00 shares had been
issued and 462,285 share are shown as to be issued.

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

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

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

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

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

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

ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

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

COVOL TECHNOLOGIES, INC.
(FORMERLY ENVIRONMENTAL TECHNOLOGIES GROUP INTERNATIONAL)
AND SUBSIDIARIES

Nine
Year Ended Months Ended Year Ended Year Ended Year Ended
December 31, September 30, September 30, September 30, September 30,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------------------------------------------------------------------------
Statement of Operations Data:
Revenues:

License fees $ -- $ -- $ 100,000 $ 100,000 $ --
Synthetic fuel sales, net 12,688 19,867 29,310 195,165 41,841
Binder sales -- -- -- -- 208,836
--------------------------------------------------------------------------------
Total revenues 12,688 19,867 129,310 295,165 250,677

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

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

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

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

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

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

Loss from discontinued
operations 145,965 609,354 (1,129,176) (881,505) --
--------------------------------------------------------------------------
Cumulative effect of
change in accounting principle -- 31,302 -- -- --
---------------------------------------------------------------------------
Net income (loss) ($715,006) $143,042 ($5,653,551) ($13,836,320) ($10,995,080)
--------------------------------------------------------------------------

Net income (loss) per common share

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

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

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

--------------------------------------------------------------------------
Income per share of cumulative
effect of change in accounting
principle 0.00 0.01 0.00 0.00 0.00
--------------------------------------------------------------------------

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

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

Nine
Year Ended Months Ended Year Ended Year Ended Year Ended
December 31, September 30, September 30, September 30, September 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------------
Balance Sheet Data:

Working capital ($423,570) ($619,907) ($480,420) ($3,482,227) ($3,195,420)
Net property and equipment 341,455 747,952 1,330,300 7,125,245 13,619,271
Total assets 2,129,885 4,852,637 2,659,977 8,772,072 26,360,814
Long-term debt 511,193 852,081 176,601 363,592 5,467,389
Total stockholders' equity 1,107,915 2,989,529 1,182,768 (233,364) 5,928,277

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

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

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

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

Continuing Operations

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

Operating Costs and Expenses. Operating costs and expenses decreased
$2,108,652 to $11,164,577 for the fiscal year ended September 30, 1997 from
$13,273,229 for the fiscal year ended September 30, 1996. Operating costs and
expenses attributable to the briquetting operations increased $3,943,674 to
$4,803,248 for fiscal 1997 from $859,574 for the fiscal year 1996. On or before
December 31, 1996, the Company entered into several contracts to construct
synthetic fuel facilities. In order for the contracts to be binding for purposes
of qualification for Section 29 treatment, the Company agreed to pay a penalty
of 6% of the expected contract price for the facilities if the Company did not
proceed with construction. As of the fiscal year ended September 30, 1997 and as
of the date of filing of this document, there were several contracts that will
not or may not be completed by June 30, 1998. Accordingly, the Company recorded

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

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

Selling, general and administrative expense decreased $798,757 or 21.0%
to $2,997,812 for the year ended September 30, 1997 from $3,796,569 for the year
ended September 30, 1996. The decrease related principally to reductions in
costs for administrative labor, outside professional services and travel
expenses. The reduction in these expenses is due to the Company's use of
personnel, resources and efforts on the commercialization of the Company's
synthetic fuel technology.

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

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

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

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

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

In late July 1996, the Company negotiated with PacifiCorp the general
terms of the sale of the Alabama Plant, including an arrangement for convertible
debt in the amount of up to $5 Million to fund working capital and construction
costs needed to complete the Alabama Plant. At the time of these negotiations,
the Company agreed to a conversion price of $7 per share, the trading price of
the Company's stock at the time the deal was initially negotiated. The actual
documents completing this agreement were not finalized until March 20, 1997, at
which time the bid price of the common stock of the Company was approximately $9
per share. Notwithstanding the fact that at the time the Company initially
negotiated the conversion price there was no discount, because there was a
discount as of the date the documents for the transaction were completed and
signed, the Company is required to reflect as interest expense the deemed
discounted value, the difference at the date of issue of the convertible debt
security between the conversion price and the fair market value of the common
stock into which the security is convertible, multiplied by the number of shares
into which the security is convertible. The expense will not require an actual
cash payment nor will it impact the net equity of the Company.

This accounting treatment is consistent with guidance issued by the
Securities and Exchange Commission and with guidance issued as of March 13, 1997
by the Emerging Issues Task Force of the AICPA (Statement EITF D-60: Accounting
for the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature).

The minority interest in the loss of consolidated subsidiaries
increased $1,240,770 to $1,245,226 for fiscal 1997 from $4,456 for fiscal 1996.
The increase is attributable to the minority interest in the loss incurred by US
#1 in fiscal 1997. The current period represents the first full year of
operations of US #1. US #1 incurred losses in fiscal 1997 due to: the sale of
the Utah Plant at an amount less than its cost (after adjustment for the
installation of the new dryer), start-up costs for the facility, expense
incurred for license fees, and the obligation to purchase synthetic fuels
produced at a price equal to cost plus $1 per ton. See ITEM 1.
BUSINESS--Business of Company--Utah Plant."

Loss from Continuing Operations. For the year ended September 30, 1997,
the Company had a net decrease of $1,959,735 in loss from continuing operations.
The decrease is principally due to: reductions in research and development costs
and selling, general and administrative costs; reductions in expenses for
compensation expense from stock options, stock warrants and issuance of common
stock; and reduction in the writedown of notes receivable. These reductions were
partially offset by: increases in costs for briquetting operations, including
losses attributable to the Utah Plant and penalties for failure to proceed with
construction contracts; loss from the sale of the Utah Plant, and interest
expense booked on the PacifiCorp convertible debt.

Discontinued Operations

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

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

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

Continuing Operations

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

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

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

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

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

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

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

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

Discontinued Operations

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

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

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

Continuing Operations

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

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

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

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

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

Discontinued Operations

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

Liquidity and Capital Resources

Liquidity

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

Capital Resources

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

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

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

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

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

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

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

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

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

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

Existing Debt Arrangements

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

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

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

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

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

The Company is constructing a wash plant to provide washed coal fines
to the Utah Plant for the manufacture of synthetic fuel. The construction is
being financed through Gallagher. The total estimated cost for the wash plant is
approximately $4 Million. As of September 30, 1997, the Company had borrowed
$945,104. The financing is evidenced by a promissory note executed and delivered
by the Company to Gallagher and is secured by the wash plant. The note currently
bears interest at 6% per annum with principal and interest due and payable two
years from the time the debt was incurred. As additional consideration to
Gallagher for financing the wash plant, the Company agreed, subsquent to fiascal
1997, to grant Gallagher warrants to purchase approximately 400,000 shares of
the Company common stock with fifty percent of the shares having a purchase
price of $10 per share and fifty percent of the shares having a purchase price
of $20 per share. The warrants are immediately exercisable and expire in two
years.

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

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

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

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

Forward Looking Statements

Statements in this Item 7 regarding the Company's expectations as to
the financing, development and construction of facilities utilizing its
Briquetting Technology, the receipt of licensing and royalty fees, revenues, the
receipt of operation and maintenance fees, the receipt of fees for sale of
binder materials, and other information presented herein that are not purely
historical by nature, constitute forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from its expectations.
In addition to matters affecting the Company's industry or the coal industry or
the economy generally, factors which could cause actual results to differ from
expectations set forth in the above-identified forward looking statements
include, but is not limited to, the following: (i) timely construction and
completion of facilities, and in particular, the coal briquetting facilities by
the placed-in-service date; (ii) ability to obtain needed additional capital on
terms acceptable to the Company; (iii) changes in governmental regulation or
failure to comply with existing regulation which may result in operational
shutdowns of its facilities; or (iv) the availability of tax credits under
Section 29 of the Code. See "ITEM 1. BUSINESS--Forward Looking Statements" for a
description of additional factors which could cause actual results to differ
from expectations.

Impact of Recently Issued Accounting Standards

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

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

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

Impact of Inflation

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

Alan D. Ayers 40 Vice President of Administration

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

Steven R. Brown 39 Vice President of Engineering and
Construction

Russell G. Madsen 47 Vice President

Max E. Sorenson 48 Vice President

Dee J. Priano 52 Vice President

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

Raymond J. Weller 51 Chairman of the Board of Directors

DeLance W. Squire 78 Director

Vern T. May 57 Director

James A. Herickhoff 55 Director

John P. Hill, Jr. 37 Director

Brent M. Cook has served as President and Chief Executive Officer and Director
since October 1996, and served as Chief Financial Officer from June 1996 until
December 1996. Mr. Cook is a Certified Public Accountant. Prior to joining the
Company, Mr. Cook was Director of Strategic Accounts-Utah Operations, for
PacifiCorp, Inc. ("PacifiCorp"). His responsibilities included the management of
revenues of approximately $128 Million per year, and seeking out and evaluating
strategic growth opportunities for PacifiCorp, including joint ventures and
other transactions. Mr. Cook spent more than 12 years with PacifiCorp.
PacifiCorp is not affiliated with the Company except for the transaction
described in "ITEM 1. BUSINESS--Business of Company".

Stanley M. Kimball has served as Chief Financial Officer and Director since
January 1, 1997 and as Treasurer since May 1997. Prior to joining the Company,
Mr. Kimball was employed by Huntsman Corporation ("HC"). From 1989 to early
1995, Mr. Kimball served as the Director of Tax for Huntsman Chemical
Corporation ("HCC"). In May 1995, Mr. Kimball was appointed as an officer of
HCC, serving as Vice President, Tax. In July 1995, Mr. Kimball was appointed as
Vice President, Administration for HC. In this position, he had numerous
responsibilities, both for HC and for Mr. Jon M. Huntsman personally, which
included financial accounting, tax and estate planning, and cash and investment
management. In this position, Mr. Kimball also served as Mr. Huntsman's Chief of
Staff. In 1980, Mr. Kimball received a Master of Accountancy, with emphasis in

taxation, from Brigham Young University and is a Certified Public Accountant.
Between 1980 and 1989, he was employed by Arthur Andersen & Co., and was serving
as a Senior Tax Manager prior to his employment with HCC.

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

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

Steven R. Brown has served as Vice President of Engineering and Construction of
the Company since February 1995. Mr. Brown served as a Director of the Company
from September 1995 to March 1997. Mr. Brown was responsible for the management
of the construction companies and the limestone quarry. He is currently
responsible for the design and construction of the Company's production
facilities. From 1993 to 1995, Mr. Brown was President of Construction
Management Service, Inc. Mr. Brown is a licensed professional engineer and a
licensed general contractor. Mr. Brown obtained a B.S. degree in Civil
Engineering and a Master of Business Administration from Brigham Young
University.

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

Max E. Sorenson has served as Vice President of the Company since April 1997.
Prior to Mr. Sorenson's employment with the Company, Mr. Sorenson was Senior
Vice President of Operations, Engineering and Technology of Geneva Steel
Company. Mr. Sorenson began his employment with Geneva Steel Company in October
1989. During his employment with Geneva Steel Company, Mr. Sorenson also had
responsibility for raw materials, transportation contracts and information
systems and also served as Chief Engineer of Coke, Iron and Steel, and Vice
President of Engineering. Prior to joining Geneva Steel Company, Mr. Sorenson
worked for 16 years for Inland Steel, Inc., one of the largest steel companies
in the United States, where he served in various operation and technology

management positions in ironmaking and steelmaking. Mr. Sorenson obtained a B.S.
degree in Metallurgical Engineering from the University of Utah in 1973 and a
Master of Science degree in Industrial Management from Purdue University in
1978.

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

Asael T. Sorensen, Jr. joined the Company as its General Counsel in September
1995. He has also served as Corporate Secretary since June 1996. From 1982 to
1995, Mr. Sorensen was an in-house attorney for the Church of Jesus Christ of
Latter-Day Saints in Salt Lake City, Utah and practiced law primarily in the
area of contract negotiations and administration. Since 1987, Mr. Sorensen has
been a consultant with the American Management Association, a business seminar
and consulting non-profit organization headquartered in New York. Mr. Sorensen
graduated from Brigham Young University with a joint Juris Doctor and Master of
Business Administration. He is admitted to practice law in the State of Utah.

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

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

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

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

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

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

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

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 11. EXECUTIVE COMPENSATION

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

Summary Compensation Table

Annual Compensation Long-Term Compensation

Other Annual Restricted All Other
Name and Compensation Stock Stock Options Compensation
Principal Position Year Salary($) Bonus ($) ($) Awards ($) (#) ($)
- ------------------ ---- --------- --------- ----------------- ---------- ---------------- -------------

Brent M. Cook (1) 1996 $23,335 $60,000 $1,163,000(2) -- 40,000(2) --
President and CEO 1997 93,811 -- (3) -- -- -- --
- ------------------

(1) Mr. Cook entered into an employment agreement dated June 1, 1996 to act
as Executive Vice President and Chief Financial Officer. Mr. Cook was
appointed as President and Chief Executive Officer in October of 1996.
(2) Upon the execution of his employment agreement with the Company, Mr.
Cook received immediately exercisable options to acquire 100,000 shares
of the Company's common stock at a price of $1.50 per share. This
amount represents $1,163,000 of compensation recorded by the Company as
a result of the option grant to Mr. Cook. Mr. Cook also received an
option to acquire 40,000 shares of the Company's common stock at a
price of $1.50 per share, which vests over 10 years.
(3) Mr. Cook was awarded a performance based bonus of $50,000 in November
1997, which has been recorded as a bonus in fiscal year 1998 and,
accordingly, is not reflected in this table.

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

Option Grants in Fiscal Year 1997

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

Aggregated Option Exercises and Year-End Option Values in 1997

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

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

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

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

Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------- ----------- ------------- ----------- -------------

Brent M. Cook -0- $-0- 104,000 36,000 $806,000 $ 279,000

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

The Company has no LTIP.

Future Benefits of Pension Plan Disclosure in Fiscal Year 1997

The Company has no such benefit plans.

Employment Contracts and Termination of Employment and Change in Control
Arrangements

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

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

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

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

Director Compensation

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

Stock Option Plans

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

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

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

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

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

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

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

Stanley M. Kimball 50,000 $1.50

Max E. Sorenson 50,000 $1.50

Vern T. May 2,500 $1.50

Raymond J. Weller 2,500 $1.50

DeLance W. Squire 2,500 $1.50

James A. Herickhoff 2,500 $9.00

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

Board Meetings

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

Committees Of The Board

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

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

Compensation Committee Report on Executive Compensation

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

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

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

Compensation Committee,

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

Stockholder Return Performance Graph

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

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

Comparison of Cumulative Total Return

[GRAPHIC OMITTED]

Total Returns Assume Reinvestment of Dividends

9/30/94 9/30/95 9/30/96 9/30/97
--------------------------------------------------------------------------

COVOL $100 $230 $265 $296

S&P ENERGY COMPOSITE 100 120 150 220

NASDAQ COMPOSITE (US) 100 137 161 221

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

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

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

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

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

Brent M. Cook 108,000(6) 1.15

Stanley M. Kimball 59,126(7) *

Alan D. Ayers 44,500(8) *

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

Steven R. Brown 93,600(10) *

Russell G. Madsen 470,461(11) 4.11

Max E. Sorenson 33,334(12) *

Dee J. Priano 24,000(13) *

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

Raymond J. Weller 266,465(15) 2.86

DeLance W. Squire 2,500(16) *

Vern T. May 2,500(16) *

James A. Herickhoff 2,500(16) *

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

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

* Less than 1%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Changes in Control.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

PART IV

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

(a) 1. Financial Statements

Consolidated Financial Statements of Covol Technologies, Inc.

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

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

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

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

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

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

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

2. Exhibits

All exhibits listed hereunder, unless otherwise indicated, have
previously been filed as exhibits to the Company's Form 10, Form 10/A, Form
10-K, Form 10-Qs, and Form 8-Ks. Such exhibits have been filed with the
Securities and Exchange Commission ("Commission") pursuant to the requirements
of the Acts administered by the Commission. Such exhibits are incorporated
herein by reference under Rule 24 of the Commission's Rules of Practice and
Investigations. Certain other instruments which would otherwise be required to
be listed below have not been so listed because such instruments do not
authorize securities in an amount which exceeds 10% of the total assets of the
Company and its subsidiaries on a consolidated basis and the Company agrees to
furnish a copy of any such instrument to the Commission upon request.

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

Report of Independent Accountants

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

We have audited the accompanying consolidated balance sheets of Covol
Technologies, Inc. and Subsidiaries as of September 30, 1996 and 1997, and the
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended September 30, 1995, 1996, and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

Salt Lake City, Utah
December 31, 1997

F-1

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
as of September 30, 1996 and 1997

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

Current assets:

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

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

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

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

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

F-2

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

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

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

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

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

Commitments and contingencies

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

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

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

F-3

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
------------- ------------- -------------
Revenues:

License fees $ 100,000 $ 100,000 -
Synthetic fuel sales, net 29,310 195,165 $ 41,841
Binder sales - related party - - 208,836
----------- ------------ ------------

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

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

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

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

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

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

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

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

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

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

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

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

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

- Continued -

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

F-4

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS, Continued

Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------
Net loss per common share:

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

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

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

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

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

F-5

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

Notes and
interest
receivable - Deferred
Common stock to be issued related parties compen-
Capital in Capital in Accumu- from issuance of, sation
Common Stock excess of excess of lated or collateralized on stock
Shares Amount par value Shares Amount par value deficit by, common stock options
------ ------ --------- ------ ------ --------- ------- ---------------- -------

Balances at
September 30, 1994 3,935,584 $ 3,936 $4,092,198 175,000 $ 175 $ 699,825 $(1,706,605) $ (100,000) $ 0

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

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

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

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

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

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

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

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

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

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

- Continued -

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

F-6

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Compensation expense
related to the issuance
of stock for services
at below market value $ 148,447

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

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

Amortization of deferred
compensation on
stock options $ 466,902

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

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

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

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

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

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

- Continued -

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

F-7

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Cash received in
payment on notes
receivable - related
parties from issuance
of common stock $ 171,393

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

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

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

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

Amortization of deferred
compensation on stock
options 909,959

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

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

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

- Continued -

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

F-8

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Common stock issued for
cash received in
the prior period 103,750 $104 $ 934,896 (103,750) $(104) $ (934,896)

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

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

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

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

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

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

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

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

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

- Continued -

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

F-9

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Common stock to be
issued under
subscription
agreements 32,500 $ 32 $ 227,468

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

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

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

Write down of notes
receivable - related
party 60,000

Net loss for year
ended September 30, 1997 $(10,995,080)
--------- ------ ----------- ------- ---- ---------- ------------ ----------- -----------
Balance at
September 30, 1997 8,627,290 $8,627 $41,818,549 462,285 $462 $3,291,783 $(32,191,556) $(7,411,278) $(4,683,247)
========= ====== =========== ======= ==== ========== ============ =========== ===========

Capital in
Preferred Stock excess of
Shares Amount par value
------ ------ ---------

Balances at
September 30, 1996 - - -

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

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

F-10

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------
Cash flows from operating activities:

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

- Continued -

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

F-11

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

Year ended Year ended Year ended
September 30, September 30, September 30,
1995 1996 1997
---------------- ---------------- ----------------

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

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

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

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

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

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

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

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

F-12

NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

Business Organization

Covol Technologies, Inc. (the Company) was originally incorporated in
Nevada in 1987 and reincorporated in Delaware in August, 1995. In
August 1995, the Company changed its name to Covol Technologies, Inc.
from Environmental Technologies Group International. In 1991, the
Company acquired a coal briquetting technology (the Briquetting
Technology). In 1992, the Company constructed a pilot briquetting
plant in Price, Utah. During 1993, the Company refined the technology
to briquette waste by-products of the steel manufacturing industry.
The Company is currently developing and marketing the Briquetting
Technology.

In June 1996, the Company formed Utah Synfuel #1, Ltd. ("Utah Synfuel
#1") and Alabama Synfuel #1 ("Alabama Synfuel #1"), each a Delaware
limited partnership (collectively the "Partnerships"). The Company is
both the general partner and a limited partner in the Partnerships.

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

Construction and Limestone Businesses

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

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

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

Continued

F-13

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Principles of Consolidation

The 1995 and 1996 consolidated financial statements include the
accounts of the Company and its 100% owned subsidiaries, IME, State,
CIC and Larson, until the time of their sale, effective February 1,
1996. The 1996 and 1997 consolidated financial statements include the
accounts of the Company and its two majority owned subsidiaries, Utah
Synfuel #1 and Alabama Synfuel #1 from their inception in 1996. All
significant intercompany transactions and accounts are eliminated in
consolidation.

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

Stock Split

Effective June 14, 1995, the Company implemented a one-for-twenty
reverse stock split. In addition, the Company implemented a
two-for-one stock split, effective January 23, 1996. All information
set forth herein has been adjusted to give effect to these stock
splits.

Revenue and Cost Recognition

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

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

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

Continued

F-14

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Revenue and Cost Recognition, Continued

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

Cash and Cash Equivalents

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

Inventories

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

Property, Plant and Equipment

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

Continued

F-15

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Property, Plant and Equipment

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

Technology and Trade Secrets

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

Loss Per Share Calculation

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

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

Continued

F-16

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

1. Summary of Significant Accounting Policies, Continued:

Use of Estimates

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

Reclassifications

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

Accounting for Contingencies

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

2. Advances on Inventories:

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

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

Continued

F-17

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

3. Notes Receivable - Related Parties:

Notes receivable - related parties consists of the following:

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

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

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

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

703,733 4,092,120

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

Total non-current $700,000 $3,816,604)
======= ==========

Continued

F-18

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

4. Property, Plant and Equipment:

Property, plant and equipment consists of the following:

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

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

5. Due To Related Party:

Due to related party consists of the following:

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

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

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

Total due to related party $ 0 $(1,038,667)
=========== ==========

Continued

F-19

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

6. Notes Payable and Convertible Debentures:

Notes payable and convertible debentures consists of the following:

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

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

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

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

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

Continued

F-20

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

6. Notes Payable and Convertible Debentures, Continued:

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

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

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

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

1,109,066 8,147,526

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

Total non-current $ 150,980 $2,900,000
========== ==========

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

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

Year ending September 30,

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

Continued

F-21

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

7. Notes Payable - Related Parties:

Note payable - related parties consists of the following:
September 30, September 30,
1996 1997
---- ----

Note payable to a shareholder, non-interest bearing, $4,000 due
monthly with all remaining principal and interest due in January,
1997, paid in March 1997 through issuance of common stock. $136,000 -

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

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

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

Year ending September 30,

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

Continued

F-22

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

8. Deferred Compensation Agreement:

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

9. Income Taxes:

The Company accounts for income taxes using the asset and liability
approach in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". The Company
filed a consolidated tax return with its 100% owned subsidiaries (IME,
State, CIC and Larson) through the time of their sale on February 1,
1996. Both majority owned limited partnerships file separate tax
returns, as required.

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

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

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

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

Tax provision $ (488,000) $ (23,000) $ 0
=========== =========== ===========

Continued

F-23

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

9. Income Taxes, Continued

The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to
the net deferred tax assets and liabilities relate primarily to net
operating losses and expenses related to compensatory stock options.
Other differences include the use of accelerated depreciation for tax
purposes and straight-line depreciation for book purposes, and the
recording of certain reserves for book purposes. The components of the
net deferred tax asset as of September 30, 1996 and 1997 are as
follows:
1996 1997
---------------- ---------------
Deferred tax assets (liabilities):

Net operating loss carryforwards $ 5,830,000 $ 6,282,000
Research and development tax credit
carryforwards 141,000 189,000
Amortization of trade and technology 72,000 43,000
Write-off of license - 104,000
Write-down of note receivable - 712,000
Compensation expense due to common stock options - 2,003,000
Reserve for contractor's liability - 551,000
Depreciation (65,000) (111,000)
Other - 45,000
----------- -----------
Total deferred tax assets 5,978,000 9,818,000
Valuation allowance (5,978,000) (9,818,000)
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========

The valuation allowance changed by $3,840,000 during the year ended
September 30, 1997, representing the amount of deferred tax assets at
September 30, 1997 not considered recoverable through the reversal of
taxable temporary differences, or the generation of future taxable
income. SFAS No. 109 requires that a valuation allowance be provided
if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The Company's ability to realize the
benefit of its deferred tax assets will depend on the generation of
future taxable income through its continuing operations or through the
sale of assets. Because the Company has not generated significant
revenues to date relating to the Briquetting Technology, the Company
believes that a valuation allowance of $9,818,000 should be provided
as of September 30, 1997. This estimate may change in the near term.

Continued

F-24

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

10. Leases:

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

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

Year Ending September 30,

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

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

Continued

F-25

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

11. Notes and Interest Receivable - Related Parties, Collateralized by
Common Stock:
September 30, September 30,
1996 1997
------------- -------------

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

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

Continued

F-26

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

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

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

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

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

Total $7,580,071 $7,411,278
========== ==========

12. Issuances of Preferred and Common Stock

Significant issues of common and preferred stock are detailed below:

Common Stock

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

Continued

F-27

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

12. Issuances of Preferred and Common Stock, Continued:

Common Stock, Continued

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

Preferred Series A - Non-Voting

During August 1997, Covol Technologies filed a Certificate of
Designation to establish a new non-voting class of preferred stock,
"Series A 6% Preferred" with a par value of $.001 per share. As of
September 30, 1997, 3,000 shares of Series A shares were issued and
outstanding for $3,000,000. The Series A preferred shares have the
following rights and privileges:

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

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

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

Continued

F-28

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

12. Issuances of Preferred and Common Stock, Continued:

Preferred Series A - Non-Voting, Continued

4. The holders of the shares are entitled to convert their shares to
common shares at any time. The conversion price is the number of
preferred shares to be converted multiplied by $1,000 and divided
by the conversion price (i.e., $7.00 per share). At any time after
August 31, 1999, the Company has the right to require any holder of
the Series A preferred shares to convert their shares into common
stock.

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

Preferred Series B - Non-Voting

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

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

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

Continued

F-29

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

12. Issuances of Preferred and Common Stock, Continued:

Preferred Series B - Non-Voting, Continued

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

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

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

13. Stock Options and Warrants:

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

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

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

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

Continued

F-30

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

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

1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----

Outstanding at begin-
ning of the year 1,366,500 $1.62 2,030,000 $ 2.37 296,300 $1.10
Granted 445,000 6.08 1,611,500 3.51 1,930,000 2.43
Exercised (73,000) 1.84 (1,085,000) 5.92 (196,300) 1.08
Forfeited (125,000) 1.50 (1,190,000) 1.54 0 0.00
--------- ---- ---------- ------- --------- ----

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

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

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

Assumed risk free rates 7.80% 5.71% - 6.98% 6.40% - 7.09%

Continued

F-31

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

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

Weighted
Options Average Weighted Exercisable Weighted
Outstanding at Remaining Average Options at Average
September 30, Life Exercise September 30, Exercise
Price 1997 (in years) Price 1997 Price
---------------- --------------- -------------- ---------------- --------------- ----------

$1.50 to $3.50 1,311,000 9 $ 1.60 673,761 $1.70
$8.00 to $9.00 302,500 10 8.24 38,308 8.12
---------- -------
1,613,500 9 2.85 712,069 2.04
========= =======

1995 Stock Option Plan

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

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

Continued

F-32

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

1995 Stock Option Plan, Continued

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

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

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

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

Non-Qualified Options

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

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

Continued

F-33

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

Non-Qualified Options, Continued

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

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

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

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

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

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

Continued

F-34

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

Non-Qualified Options, Continued

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

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

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

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

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

Continued

F-35

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

13. Stock Options and Warrants, Continued:

Compensation From Stock Options

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

Warrants

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

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

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

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

Continued

F-36

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

14. Patents:

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

15. Discontinued Operations:

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

Continued

F-37

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

15. Discontinued Operations, Continued:

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

Under the terms of the Agreement, the Company agreed to pay off
$3,500,000 of accounts payable and lines of credit outstanding in the
subsidiaries. Subsequently, the Buyers also received reimbursement
from the Company for approximately $650,000 of additional expenses
related to the discontinued operations during the wind-down period
which were paid by the Buyers. The Company has reflected those
obligations in the additional loss on the discontinued operations for
the year ended September 30, 1996.

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

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

Continued

F-38

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

16. Fair Value of Financial Instruments:

Statement of Financial Accounting Standards (SFAS) No. 107 requires
that the fair market value of certain financial instruments be
disclosed in the financial statements. The Company has the following
financial instruments that are subject to the provisions of SFAS No.
107:
* Cash and cash equivalents
* Notes receivable - related parties
* Notes payable and convertible debentures
* Notes payable - related parties
* Notes receivable - related parties from issuance of or
collateralized by common stock

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

17. Commitments and Contingency:

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

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

Continued

F-39

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

17. Commitments and Contingency, Continued:

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

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

In connection with this sale, US #1 sold to Coaltech a license to use
the Company's Briquetting Technology for an advance license fee of
$1,400,000 and an earned license fee that is payable quarterly and is
based upon briquettes manufactured and sold at the Utah facility.
These advanced license fees will be recognized as income over the life
of the supply and purchase agreement discussed below. The Company
contracted with Coaltech to operate the facility for which they will
receive a quarterly fee which is also based upon briquettes produced
and sold.

Additionally, the Company and US #1 entered into a Supply and Purchase
agreement wherein the Company agreed to provide coal fines to Coaltech
for processing into synthetic fuel at a price equal to its cost per
ton. US #1 agreed to purchase from Coaltech the synthetic fuel
produced at its cost plus one dollar per ton. The plant has the
capacity to produce 360,000 tons per year. Based upon expected
manufacturing costs and current coal prices, the Company expects to
incur a loss under this supply and purchase agreement which will
reduce the earned license fees they will receive. The Company believes
the earned license fees will exceed any losses incurred under the
supply and purchase agreement.

Continued

F-40

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

17. Commitments and Contingency, Continued:

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

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

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

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

Continued

F-41

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

17. Commitments and Contingency, Continued:

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

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

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

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

Continued

F-42

COVOL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, Continued

17. Commitments and Contingency, Continued:

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

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

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

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

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

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

F-43

Section No. Exhibit No. Description Location

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

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

2 2.3 Stock Purchase Agreement, dated July 1, (1)
1993, among the Company, Lloyd C.
McEwan, Michael McEwan, Dale F. Minnig
and Ted C. Strong regarding the purchase
of Industrial Management & Engineering,
Inc. and Central Industrial
Construction, Inc.

2 2.4 Stock Sale Transaction Documentation, (1)
effective as of September 30, 1994,
between the Company and Farrell F.
Larson regarding Larson Limestone
Company, Inc.

2 2.5 Stock Purchase Agreement dated February (1)
1, 1996 by and among the Company,
Michael McEwan and Gerald Larson
regarding the sale of State, Inc.,
Industrial Engineering & Management,
Inc., Central Industrial Construction,
Inc., and Larson Limestone Company, Inc.

2 2.5.1 Amendment to Share Purchase Agreement (1)
regarding the sale of the Construction
Companies

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

3 3.1 Certificate of Incorporation of (1)
the Company

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

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

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

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

3 3.2 By-Laws of the Company (1)

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

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

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

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

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

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

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

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

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

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

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

10 10.5 1995 Stock Option Plan (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10 10.12 [Intentionally Omitted] (1)

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

10 10.14 [Intentionally Omitted]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10 10.27 Settlement Agreement, dated September (3)
17, 1996, among the Company,
Environmental Technologies Group
International, Inc., Larson Limestone
Company, Inc., Michael M. Midgley, Mark
Hardman, Kenneth M. Young, Irene Larson,
Farrell Larson, Gary Burningham and
Burningham Enterprises, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

21 21.1 List of Subsidiaries of the Company *

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

* Attached hereto.

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

b. Reports on Form 8-K

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

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

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

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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

COVOL TECHNOLOGIES, INC.

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

By:/s/ Stanley M. Kimball
-----------------------------------------------
Stanley M. Kimball, Principal Financial Officer

Date: January 12, 1998

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

Signature Title Date
- --------- ----- ----

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

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

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

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

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

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

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

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

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

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

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

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

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

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